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Calculation of company cost of capital and WACC

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1) A company is 40% financed by risk- free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company's common stock is 0.5. What is the company cost of capital? What is the after- tax WACC, assuming that the company pays tax at a 35% rate?

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Solution Preview

The first step in calculating the after-tax WACC is calculating the cost of each component of the WACC.

The WACC is equal to the cost of each component multiplied by its weight (proportion of financing provided by that component).

First, we will calculate the after-tax cost of debt. This is equal to the interest rate (which is the cost) multiplied by 1 minus the tax rate. ...

Solution Summary

The question provides the percentage of debt in the company's capital structure, the interest rate, the market risk premium, the tax rate, and the company's common stock beta. This information is used to calculate the company cost of capital and the after-tax weighted average cost of capital (WACC).