SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm's tax rate is 30%.

Question

Quizplus · Accepted Answer

A) Cost of debt = rate on bank debt = 5%
Cost of equity = Risk-free rate + Beta × Market risk premium 11eaabab_c080_9165_b90e_8f60b2cfcd53_TB5536_00 Weight of debt = 1- Weight of equity. 11eaabab_c080_b876_b90e_1d13125579bc_TB5536_00 Cost of equity = 0.03 + 2 × 0.09 = 0.21 or 21%
Weight of equity = 10/(10 + 5) = 0.66666667 or 66.67%
Weight of debt = 1 - 0.66666667 = 0.33333333 or 33.33% 11eaabab_c080_b877_b90e_198e391d11bb_TB5536_00

SIROM Scientific Solutions Has $10 Million of Outstanding Equity and $5