Tuesday, July 12, 2011

What is the weighted average cost of capital of this firm?

A firm has a 1 to 2, debt to equity ratio (hint 1/3 debt, 2/3 equity). The beta of its equity security is 1.35, while the overall market beta is one and overall market return for the yr has been 10.75% (s&p 500). The firm pays its own bond holders an overall marginal debt fee of $97.50 per year, while investing in risk free treasury securities at 5.95% per year. The tax rate of the firm is 38%. What is the weighted average cost of capital of this firm?

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