Permian Trucking's CFO is interested in estimating the company's WACC and has collected some information for this purpose. The company has bonds outstanding that mature in 26 years with an annual coupon of 7.5 percent. The bonds have a face value of $1,000 and sell in the market today for $920. The risk-free rate is 6 percent. The market risk premium is 5 percent; the stock's beta is 1.2; and the company's tax rate is 40 percent. The company's target capital structure consists of 70 percent common equity and 30 percent debt. The company uses the CAPM to estimate the cost of common equity and plans on using retained earnings to fund the equity portion of its capital budget. What is Permian's WACC?
A) 9.11%
B) 9.32%
C) 9.53%
D) 9.89%
E) 10.07%

Question

Quizplus · Accepted Answer

The Answer of Permian Trucking's CFO is interested in estimating the company's WACC and has collected some information for this purpose. The company has bonds outstanding that mature in 26 years with an annual coupon of 7.5 percent. The bonds have a face value of $1,000 and sell in the market today for $920. The risk-free rate is 6 percent. The market risk premium is 5 percent; the stock's beta is 1.2; and the company's tax rate is 40 percent. The company's target capital structure consists of 70 percent common equity and 30 percent debt. The company uses the CAPM to estimate the cost of common equity and plans on using retained earnings to fund the equity portion of its capital budget. What is Permian's WACC?
A) 9.11%
B) 9.32%
C) 9.53%
D) 9.89%
E) 10.07%

Permian Trucking's CFO Is Interested in Estimating the Company's WACC