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# WACC

Please show formulas and solution on how to complete this one.

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A company's balance sheets show a total of \$30 million long-term debt
with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11
percent, and the debt has a total current market value of \$25 million. The
balance sheets also show that that the company has 10 million shares of
stock; the total of common stock and retained earnings is \$30 million. The
current stock price is \$7.5 per share. The current return required by
stockholders, rS, is 12 percent. The company has a target capital
structure of 40 percent debt and 60 percent equity. The tax rate is 40%.
What weighted average cost of capital should you use to evaluate
potential projects?

#### Solution Preview

The WACC should be based on the target capital structure and market value returns
The after tax cost of debt is 11.11%X(1-0.4)=6.666%.
The ...

#### Solution Summary

The solution explains how to calculate the WACC

\$2.19