The current market rate of return (Rm) is 25% and the risk-free rate (rf) is 6%. The β of the equity is 1.3 and the tax rate is 45%.

You have been given the job of determining your firm's cost of capital components. The company has 10 million shares outstanding with a current market value of $2.80 per share. The debt represents 30% of the capital structure and the yield to maturity (YTM) is 22%.

a) How does one calculate a company’s WACC?

b) When calculating a firm’s WACC, why are market value weights more appropriate than book value weights?

c) What can a corporation do to lower its cost of capital?

d) What is the market value of the firm?

e) What is the market value of debt?

f) What is the firm's WACC?

Answer rating: 100% (QA)

a The Weighted Average Cost of Capital WACC is calculated using the following formula WACC EV Re DV Rd 1 T Where EV is the proportion of equity in the ... View the full answer