EXPERT ANSWERS: 1 Billick Brothers is estimating its WACC. The company has collected the following information: ? Its capital structure consists of 40 percent debt and 60 percent common equity. The company has 20-year bonds

Monday, May 31, 2010

1 Billick Brothers is estimating its WACC. The company has collected the following information: ? Its capital structure consists of 40 percent debt and 60 percent common equity. The company has 20-year bonds

1 Billick Brothers is estimating its WACC. The company has collected the following information: ? Its capital structure consists of 40 percent debt and 60 percent common equity. The company has 20-year bonds outstanding with a 9 percent annual coupon that are trading at par. ? The company’s tax rate is 40 percent. ? The risk-free rate is 5.5 percent. ? The market risk premium is 5 percent. ? The stock’s beta is 1.4. What is the company’s WACC?

SOLUTION

1 comment:

My Two CentsMay 10, 2011 at 5:12 PM
Use the weighted average cost of capital formula to solve the problem. You'll also need the CAPM formula to derive the cost of equity for the company.

This discounted cash flow valuation will walk you through both calculation. You have all the inputs you need for it.
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