Question - The following financial statement data pertains to ABC Company (dollar amounts in millions):
Total Assets $145,782
Interest-Bearing Debt $32,659
Average Pre-tax borrowing cost 8.25%
Common Equity:
Book Value $22,515
Market Value $65,843
Income Tax Rate 40%
Market Equity Beta 0.85
Market Premium 7.5%
Risk-free interest rate 2.2%
Required:
a. Calculate the company's cost of equity capital using CAPM.
b. Calculate the weight on debt capital that should be used to determine ABC's weighted-average cost of capital.
c. Calculate the weight on equity capital that should be used to determine ABC's weighted-average cost of capital.
d. Calculate ABC's weighted-average cost of capital.