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Daves Inc. recently hired you as a consultant to estimate the company’s WACC. You have obtained...

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Finance

Daves Inc. recently hired you as a consultant to estimate thecompany’s WACC. You have obtained the following information. (1)The firm's noncallable bonds mature in 20 years, have an 8.00%annual coupon, a par value of $1,000, and a market price of$1,075.00. (2) The company’s tax rate is 40%. (3) The risk-freerate is 4.50%, the market risk premium is 5.50%, and the stock’sbeta is 1.20. (4) The target capital structure consists of 35% debtand the balance is common equity. The firm uses the CAPM toestimate the cost of equity, and it does not expect to issue anynew common stock. What is its WACC?

a.8.74%

b.8.13%

c.7.52%

d.9.18%

e.9.53%

Please solve it typing or by hand so, I can study it.

Answer & Explanation Solved by verified expert
3.8 Ratings (727 Votes)
Aftertax Cost of Debt The Aftertax Cost of Debt is the aftertax Yield to maturity of the Bond The Yield to maturity of YTM of the Bond is calculated using financial calculator as follows Normally the YTM is calculated either using EXCEL Functions or by using Financial    See Answer
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Transcribed Image Text

Daves Inc. recently hired you as a consultant to estimate thecompany’s WACC. You have obtained the following information. (1)The firm's noncallable bonds mature in 20 years, have an 8.00%annual coupon, a par value of $1,000, and a market price of$1,075.00. (2) The company’s tax rate is 40%. (3) The risk-freerate is 4.50%, the market risk premium is 5.50%, and the stock’sbeta is 1.20. (4) The target capital structure consists of 35% debtand the balance is common equity. The firm uses the CAPM toestimate the cost of equity, and it does not expect to issue anynew common stock. What is its WACC?a.8.74%b.8.13%c.7.52%d.9.18%e.9.53%Please solve it typing or by hand so, I can study it.

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