Daves Inc.recently hired you as a consultant to estimate the company's WACC.You have obtained the following information.(1)The firm's noncallable bonds mature in 20 years,have an 8.00% annual coupon,a par value of $1,000,and a market price of $1,000.00.(2)The company's tax rate is 25%.(3)The risk-free rate is 4.50%,the market risk premium is 5.50%,and the stock's beta is 1.20.(4)The target capital structure consists of 35% debt and the balance is common equity.The firm uses the CAPM to estimate the cost of equity,and it does not expect to issue any new common stock.What is its WACC? Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

First, calculate the cost of debt (Kd): Since the bond is priced at par, its yield (or cost of debt) is the same as the coupon rate, which is 8.00%. The after-tax cost of debt = Kd * (1 - Tax Rate) = 8.00% * (1 - 0.25) = 6.00%.Next, calculate the cost of equity (Ke) using the CAPM formula: Ke = Risk-Free Rate + Beta * Market Risk Premium = 4.50% + 1.20 * 5.50% = 4.50% + 6.60% = 11.10%.Then, calculate the WACC: WACC = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity) = (0.35 * 6.00%) + (0.65 * 11.10%) = 2.10% + 7.22% = 9.32%.

Daves IncRecently Hired You as a Consultant to Estimate the Company's