Power Financial Corp has a current share price of $30,and a market capitalization of $20 billion.The firm's beta is 0.93,the risk-free rate is 3.2%,and the market risk premium is 7%.The firm has $12 billion of debt with a yield to maturity of 5%.If the firm's tax rate is 20%,what is Power Financial's WACC?
A)5.43%
B)5.71%
C)7.94%
D)6.55%
E)7.57%

Question

Quizplus · Accepted Answer

1. First, we need to calculate the cost of equity using the CAPM model:
Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium
Cost of Equity = 3.2% + 0.93 * 7% = 9.71%
2. Next, we need to calculate the after-tax cost of debt:
After-Tax Cost of Debt = Yield to Maturity * (1 - Tax Rate)
After-Tax Cost of Debt = 5% * (1 - 20%) = 4%
3. Now, we can calculate the WACC:
WACC = (Equity / (Equity + Debt)) * Cost of Equity + (Debt / (Equity + Debt)) * After-Tax Cost of Debt
WACC = (20 / 32) * 9.71% + (12 / 32) * 4% = 7.57%

Power Financial Corp Has a Current Share Price of $30,and