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# Calculate the WACC of the Firm

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78. Calculate the WACC of the firm given the following information: (a) Equity -\$20,000, (b) Debt - \$20,000, (c) Preferred Stock - \$4,000, (d) Tax Rate?" 30%, (e) Debt? Coupon \$70, Price \$1,250, Time until maturity: 20, (f) Equity, Market Rate 10%, and Risk free rate 3%, Beta 1.2, (g) Preferred Stock, Coupon \$50, Price \$55.

79. Using the information in the above problem and the additional information presented in here, calculate the WACC of the firm given the following information: (a) Equity, Most Recent Dividend \$2.00, Growth Rate 3%, and Price \$18.

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calculate the WACC
78. Calculate the WACC of the firm given the following information: (a) Equity -\$20,000, (b) Debt - \$20,000, (c) Preferred Stock - \$4,000, (d) Tax Rate 30%, (e) Debt Coupon \$70, Price \$1,250, Time until maturity 20, (f) Equity Market Rate 10%, and Risk free rate 3%, Beta 1.2, (g) Preferred Stock Coupon \$50, Price \$55.

Ks = risk free rate + beta(equity market rate - risk free rate)
Ks = 3% + 1.2(10% - 3%)
Ks = 11.4%

Kp = (\$55 - \$50)/\$50 = 0.10 or 10%

We need to calculate how much is the bond's cost by using the formula as follows: -

where B is the issued price/current price
C is the coupon payment
r is the require yield to maturity
...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate the WACC of the firm.

\$2.19

## Calculate WACC; Construct a Pro Forma Balance Sheet

A firm's current balance sheet is as follows:

Assets \$100 Debt \$10 Equity \$90

a. What is the firm's weighted-average cost of capital at various combinations of
debt and equity, given the following information?

Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
0% 8% 12%
10 8 12
20 8 12
30 8 13
40 9 14
50 10 15
60 12 16

b. Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with the firm's current balance sheet. What course of action should the firm take?

Assets \$100 Debt \$ Equity \$
c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?

d. If a firm uses too much debt financing, why does the cost of capital rise?

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