2 If Wild Widgets Inc were an allequity company it would hav

2. If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.2. The company has a target debt-equity ratio of .3. The expected return on the market portfolio is 11 percent, and Treasury bills currently yield 3.7 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 8.4 percent. The bond currently sells for $1,150. The corporate tax rate is 35 percent. a. What is the company\'s cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16) Cost of debt 6.99 % b. What is the company\'s cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity c. What is the company\'s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC

Solution

b. levered beta = 1.2*(1 + 0.3*0.65) = 1.4340

cost of equity = 3.7% + 1.4340*(11% - 3.7%) = 14.17%

c.

WACC = 11.95%

	Amount	weight	cost	weight*cost
equity	1.00	0.6667	14.1682%	0.0945
debt	0.30	0.2000	4.5407%	0.0091