# Estimation of Weighted Average Cost of Capital (WACC)

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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?

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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.

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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. ...

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