Question: Another company is in the process of determining its WACC. For this problem you will need to use the CAPM to calculate your answer.
(This problem is completely independent of Part 1A and 1B, all the information you need is given to you in the question.)
The current risk-free rate is 2.5% and the market is expected to return 7.5% per year. The company's beta is .75. The company expects to pay 5.75% for its debt. The target capital structure for the company is 55% equity and 45% debt. The marginal tax rate is 35%.
What is the after-tax cost of debt?
What is the cost of equity?
Calculate the WACC.