Use the information below to determine the firms cost of debt, cost of equity, and WACC. Use market values to determine the weights.
- The expected return on the market portfolio is 11% and the risk-free rate is 3%. The firm’s beta is 1.6.
- The firm has most recently paid a dividend of $2. Dividends are expected to grow at a rate of 3% per year, indefinitely.
- The firm has 1.5 million shares of common stock outstanding.
The firm has two bond issues outstanding:
1) 10,000 bonds with 5% coupon, 6% YTM, and face value of $1000 that mature in 8 years
2) 50,000 bonds with 3% coupon, 4% YTM, and face value of $1000 that mature in 12 years.
The firm’s average tax rate is 30%.