A ﬁrm uses 55% equity and 45% debt for all of its ﬁnancing needs. Shares of the common stock sell at $43. The company expects to pay $1.30 in dividends next year and increase that amount by 3%
Annually. The bonds have a 7% coupon rate and a yield-to-maturity of 6.8%. The company has a
Beta of 1.39 and a 34% marginal tax rate. What is the WACC?

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is 5.33%. The calculation is as follows:Ke = (D1 / P0) + g = (1.30 / 43) + 0.03 = 0.0605 or 6.05%Kd = YTM = 6.8%WACC = 0.55 * Ke + 0.45 * Kd * (1 - T) = 0.55 * 6.05% + 0.45 * 6.8% * (1 - 0.34) = 5.33%

A ﬁRm Uses 55% Equity and 45% Debt for All