Question: A company is estimating its Weighted Average Cost of capital (WACC). The company has collected the following information:
The capitaI structure consists of 50 percent debt and 50 percent common equity.
The company has JD10 million bank loan at 8 percent.
The company has 10-year bonds outstanding with a 6 percent annual coupon that are trading at par.
The company's tax rate is 50 percent.
The risk·free rate is 4 percent.
The market risk premium is 6 percent.
The stock's beta is 1.8
A .What is the company's WACC? Under what conditions, the company can use this cost?
B. Comment on the value of beta? Also, what can be done, by the financial officer, to reduce it?
C. If the inflation rate increases what Impact would this have on the cost of equity and why?