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Malitz Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) Malitz's noncallable bonds mature in 25 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,075.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance as common equity. Malitz uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC?

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WACC = Proportion of Debt X After Tax cost of debt + Proportion of common stock X cost of common stock

For cost of ...

Solution Summary

The solution explains how to determine the WACC