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How Can an Organization Lower its WACC?

How can an organization lower its WACC?

12.11 Lizpaz Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of the common stock is 1.15, while the beta of the debt is 0.3. The market-risk premium is 10 percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent.

What is the firm's cost of equity capital?
If a new company project has the same risk as the overall firm, what is the weighted average cost of capital for the project?
12.12 Adobe Online Inc. has an equity beta of 1.29 and a debt-to-equity ratio of 1.0. The expected return on the market is 13 percent and the risk-free rate is seven percent. The before-tax cost of debt capital is 7 percent. The corporate tax rate is 35 percent.

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How can an organization lower its WACC?

12.11 Lizpaz Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of the common stock is 1.15, while the beta of the debt is 0.3. The market-risk premium is 10 percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent.

What is the firm's cost of equity capital?

rs = rRF + B(rM - rRF)
rs = rRF + B(market-risk premium)
rs = 6% + 1.15(10%)
rs = 6% + 11.5% = 17.5%

If a ...

Solution Summary

This solution is comprised of a detailed explanation to calculate the firm's cost of equity capital and the weighted average cost of capital.

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