Problem
The American Movie Company has the following sources of financing reported on its balance sheet:
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Liabilities & Equity
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Book Value
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Debt (13% coupon bonds, $1000 face value)
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$4,000,000
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Common stock, 100,000 shares
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$6,000,000
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Total
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$10,000,000
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The bonds are currently selling for $900, and have a yield-to-maturity of 15%. The common stock is currently priced at $70 per share, and has an estimated beta of 1.5. The current risk-free rate is 6%, and the expected return on the market portfolio is 16%. The company pays taxes at the rate of 40%.
Compute the firm's weighted average cost of capital. Where calculations are required, please show them in the table below.
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Cost of
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Estimated weight of
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Debt:
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Debt:
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Common stock:
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Common stock:
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WACC =