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    Weighted average cost of capital (WACC)

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    1) JJ Industries currently has a capital structure that consists of 75 percent common equity and 25 percent debt. The risk-free rate is 5 percent. The market risk premium is 6 percent. JJ's common stock has a beta of 1.2. JJ has 20 year bonds outstanding with an annual coupon rate of 12 percent and a face value of $1,000. The bonds sell today for $1,200. The company's tax rate is 40 percent. What is the company's current weighted average cost of capital (WACC) ?

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    Solution Preview

    Please see the attached file.
    1) JJ Industries currently has a capital structure that consists of 75 percent common equity and 25 percent debt. The risk-free rate is 5 percent. The market risk premium is 6 percent. JJ's common stock has a beta of 1.2. JJ has 20 year bonds outstanding with an annual coupon rate of 12 percent and a face value of $1,000. The bonds sell today for $1,200. The company's tax is 40 percent. What is the company's current weight average cost of capital?

    Step 1: Find the cost of equity using CAPM

    CAPM (Capital Asset Pricing Model equation is:
    r A= r f + beta A (r m - r f)

    risk free rate= r f = 5% (Given)
    beta of stock= beta A= 1.2 (Given)
    return on market portfolio= r m = 11% =5%+6%
    required return on stock r A = to be determined
    Plugging in ...

    Solution Summary

    Calculates a company's current weighted average cost of capital (WACC)

    $2.19