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    WACC and leveraged returns

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    I am in need of help with these two.

    (Estimating the WACC with three sources of capital) Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?

    BOOK VALUE MARKET VALUE BEFORE-TAX COST
    Bonds $1,000 $1,000 8%
    Preferred stock $400 $300 9%
    Common stock $600 $1,700 14%

    (Leveraged returns) You have a chance to make a $70,000 one-year investment. The investment is expected to earn 15%, and there are no taxes. If you borrow $45,000 at 9% and put up the other $25,000 with your own money, what will be your expected return on the $25,000?

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    Solution Summary

    The solution explains how to calculate the WACC and how to determine leveraged returns.

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