Sirtex Medical has $10 million of outstanding equity and $10 million of bank debt. The bank debt costs 7% per year. The estimated equity beta is 2. If the market risk premium is 6% and the risk-free rate is 5%, compute the weighted average cost of capital if the firm's tax rate is 30%.

Question

Quizplus · Accepted Answer

First, we calculate the cost of debt: 
cost of debt = bank debt interest rate * (1 - tax rate) 
cost of debt = 7% * (1 - 0.30) = 4.9% 
Next, we calculate the cost of equity using the Capital Asset Pricing Model (CAPM): 
cost of equity = risk-free rate + beta * market risk premium 
cost of equity = 5% + 2 * 6% = 17% 
Now, we can calculate the weighted average cost of capital (WACC): 
WACC = (equity / total capital) * cost of equity + (debt / total capital) * cost of debt 
WACC = (10 / 20) * 17% + (10 / 20) * 4.9% = 10.95% 
Therefore, the answer is D.

Sirtex Medical Has $10 Million of Outstanding Equity and $10