Purchase Solution

Estimation of Weighted Average Cost of Capital (WACC)

Not what you're looking for?

Ask Custom Question

I need some help with the following scenario:

Suppose that a firm is at its target capital structure of 40% debt and 60% equity. It has bonds outstanding that mature in 10 years with annual coupon payments of 10% of par value of $1,000. The bonds are currently priced at $1,100. The market risk premium is 5% and the risk free rate is 4% and the beta for the firm is 0.95. The firm's tax rate is 40%. What is the firm's WACC?

Purchase this Solution
Solution Summary

This posting helps answer a question regarding the Weighted Average Cost of Capital (WACC). The explanation answers a questions regarding a firm at its target capital structure of 40% debt and 60% equity. It helps in computing the weighted Average Cost of Capital (WACC) using step by step calculations. The answer is given in three steps: computation of after-tax cost of debt, calculations of cost of equity, and computation of WACC.

Solution Preview

Problem: Suppose that a firm is at its target capital structure of 40% debt and 60% equity. It has bonds outstanding that mature in 10 years with annual coupon payments of 10% of par value of $1,000. ...

Purchase this Solution
Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

View More Free Quizzes
Related BrainMass Solutions

  • Weighted Average Cost of Capital (WACC)

    13254 Weighted Average Cost of Capital (WACC) Please see the attached file for the fully formatted problems. 5). Calculate the W.A.C.C. of the company and Compare to the R.O.I.C as derived from EVA. a. Use data from the financial statements. b.

  • WACC Estimation

    311274 WACC Estimation Assume that you were recently hired by a company (TII), as a financial analyst and that your boss, the treasurer, has asked you to estimate the company's Weighted Average Cost of Capital (WACC) under the assumption that NO new equity

  • Cost of Capital, Capital Structure, and Capital Budgeting Analysis

    , and the weighted average cost of capital (WACC) for a Phizer (PFE).

  • Cost of capital and how it is calculated

    114608 Cost of capital and how it is calculated Please provide an explanation of a company's cost of capital and how it is calculated. What is marginal cost of capital and how does it differ from weighted average cost of capital?

  • WACC

    133650 WACC: Weighted Average Cost of Capital Determine the weighted average cost of capital (WACC) for the XYZ Company that will finance its optimal capital budget with $120 million of long-term debt (kd = 12.5%) and 180 million in retained earnings

  • Calculate the Weighted-Average Cost of Capital (WACC)

    Calculate GII weighted average cost of capital (WACC). GII's weighted-average cost of capital will be computed as follows: 1.

  • Weighted Average Cost of Capital: Capital Investment Program

    320144 Weighted Average Cost of Capital: Capital Investment Program What is the Weighted Average Cost of Capital? How it is used in a capital investment program to select investments? What is the Weighted Average Cost of Capital?

  • Capital structure and cost of capital

    The objective of the capital structure management is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC). It has to optimally utilize the sources of finances which broadly are equity and Debt.

  • Divisional Cost of Capital Approach vs Weighted Average Cost of Capital

    268840 Divisional Cost of Capital Approach vs Weighted Average Cost of Capital Please explain how to calculate the weighted average cost of capital and how it compares to divisional cost of capital approach. Thank you. Currently, Red Sun, Inc.'

  • Weighted Average Cost of Capital.

    To determine cost of capital, an important concept is weighted average cost of capital. Define Weighted Average Cost of Capital (WACC). How WACC is calculated ? Take an example of a large and popular public company and calculate its WACC.

View More Related Solutions