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Evaluating the WACC Value and Cost of Equity Capital

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The common stock of William Tell Computers has a beta of .80. The treasury bill rate is 4 percent and the market risk premium is estimated at 8 percent. The company's capital structure is 30 percent debt paying a 8 percent interest rate, and 70 percent equity. The company's tax rate is 40 percent.

a. What is the company's cost of equity capital?

b. What is the WACC?

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Solution Summary

In about 220 words, this solution shows how a company's cost of equity capital and WACC are calculated. All required calculations and equations are provided.

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a. What is the company's cost of equity capital?
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We can use the Capital Asset Pricing Model - CAPM, to determine the cost of equity.

Re = Rf + B * (Rm - Rf)

Where:
Re = the company's cost of equity capital
Rf = Risk ...

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