The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. What is the required return on assets?

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Quizplus · Accepted Answer

The required return on assets can be calculated using the weighted average cost of capital (WACC) formula. First, calculate the cost of equity using the CAPM: Cost of Equity = Risk-free rate + Beta * Market risk premium = 3% + 1.5 * 9% = 16.5%. The after-tax cost of debt is 8% * (1 - 0.34) = 5.28%. The weights are based on the debt-to-equity ratio: Debt weight = 3/4, Equity weight = 1/4. WACC = (3/4 * 5.28%) + (1/4 * 16.5%) = 10.85%.

The Firm's Tax Rate Is 34