WACC and leveraged returns
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(Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?
BOOK VALUE MARKET VALUE BEFORE-TAX COST
Bonds $1,000 $1,000 8%
Preferred stock $400 $300 9%
Common stock $600 $1,700 14%
(Leveraged returns) You have a chance to make a $70,000 one-year investment. The investment is expected to earn 15%, and there are no taxes. If you borrow $45,000 at 9% and put up the other $25,000 with your own money, what will be your expected return on the $25,000?
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Solution Summary
The solution explains how to calculate the WACC and how to determine leveraged returns.
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