Problem 92  
A company is 40% financed by riskfree debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5.  
Risk Free Debt  Interest Rate  Market Risk Premium  Beta  Taxes 
40%  10%  8%  0.5  35% 
a. What is the company cost of capital?  
b. What is the aftertax WACC, assuming that the company pays tax at a 35% rate?  
Answers:  
Step 1:  
r(d)=  10%  
r(e)=  0.08  
D/V  0.6  TIP: D + E = V  
E/V  0.4  
Step 2:  
a.  Formula (in words)  Calculation  
Cost of Capital  T  C  
b.  WACC  T  C  

Subject  Business 
Due By (Pacific Time)  08/30/2015 11:59pm 
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