You have been given the following facts and assumptions concerning ABC Corp at D

Question

You have been given the following facts and assumptions concerning ABC Corp at December 31. 201.5 Yield to maturity on long term government bond is 5 00% Yield to maturity on company long term government bond is 7 0% Coupon rate on company long term bond is 7 0% Market price of risk is 8 0% along with estimated company beta value of 1 5 Stock is selling for 540 in the market and 250 million shares are outstanding Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million Existing tax rate stands at 35% Given all the information estimate the ABC Corp s weighted average cost of capital.

Explanation / Answer

capital structure of company book value debt 1250 equity 5240 6490 coupon rate tax rate 7% 35% after tax cost of debt 4.55 cost of equity IRF+(Rm-IRF)*beta 17 percent IRF RISK FREE RATE 5% Rm-IRF risk premium 8% Beta 2% weighted average cost of capital book value weight cost debt 1250 0.192604 4.55 0.876348 equity 5240 0.807396 17 13.72573 6490 weighted average cost of capital 14.60208 percent

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