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2 February, 06:54

A firm is 40% financed by debt with a yield-to-maturity of 8.5%. The equity has a beta of 1.3, the market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if the tax rate is 34%

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  1. 2 February, 10:22
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    11.076%

    Explanation:

    The computation of the WACC is shown below:

    = Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of common stock) * (cost of common stock)

    = (0.40 * 8.5%) * (1 - 34%) + (0.60 * 14.72%)

    = 2.244% + 8.832%

    = 11.076%

    The cost of common stock is

    = Risk free rate of return + Beta * market risk premium

    = 3.8% + 1.3 * 8.4%

    = 3.8% + 10.92%

    = 14.72%
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