The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)
Weighted Average Cost of Capital (WACC) = Proportion of debt X after tax cost of debt + Proportion of Equity X cost of equity
We use CAPM to ...
The solution explains the calculation of WACC