Answer Happy

Use the following information to answer the questions. Beta Expected retum S&P Index 1.0 6.0% Risk-free security 0.0 2.0% Firm A 2.0 ( )% 1) The weight of the equity (E/V) is 0.7 for Firm A while the weight of the debt is 0.3. i) Figure out the cost of equity for Firm A using CAPM. E(R) = Re =Rs + B[E(RM) - R ] = 2 + 2*[6-2] = 10% ii) Figure out the cost of debt if the bond price for Firm A is $1,079.85 for the 5-year bond with a par value of $1,000 and a coupon rate of 10% paid annually. The yield to maturity is 8%. So the cost of debt is 8%. iii) Figure out the weighted average cost of capital (WACC) of Firm A. The tax rate is 50%. WACC = (E/V) RE + (D/V) RD(1-1) = 0.7*10 +0.348 (I- 0.5)=82%