Question: The capital structure of Arlington, Inc. includes $9,000,000 of 8% bonds and $6,000,000 of common stock. Additional information: Arlingtons beta = 1.5 The treasury bond

The capital structure of Arlington, Inc. includes $9,000,000 of 8% bonds and $6,000,000 of common stock.

Additional information: Arlingtons beta = 1.5 The treasury bond (risk-free) rate = 1.4% The market risk premium = 6% The current tax rate = 30%

What does Arlingtons beta of 1.5 tell you about the firm? Compute Arlingtons required rate of return on equity. Compute Arlingtons weighted average cost of capital (WACC). Explain how a firms WACC can be useful in prospective analysis.

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