Weighted average cost of capital
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Piscataqua River Company has a 3 to 5, debt to equity ratio. The beta of its equity security is 1.75, while the overall market beta is one and overall market return for the year has been 12.15% (S&P 500). Piscataqua pays its own bond holders an overall marginal debt interest of $67.50 per year, while investing in short-term, risk-free treasury securities at 2.95% per year. The marginal tax rate of the firm is 28%. What is the weighted average cost of capital of this firm? They offer NO preferred stock at all!
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The solution explains how to calculate the weighted average cost of capital
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WACC = Proportion of debt X After tax cost of debt + Proportion of equity X cost of equity
Using the debt to equity ratio we calculate the proportion of ...
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