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Evaluating the WACC Value and Cost of Equity Capital

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?

Solution Preview

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 ...

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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