Terck, a leading pharmaceutical company, currently has a balance sheet that is as follows:
Long-term bonds $1.000
Fixed assets $1,700
Equity $1.000
Current assets $300
The firm’s income statement looks as follows:
Revenues $1,000
Cost of Goods Sold (COGS) $400
Depreciation $100
EBIT $500
Long-term interest expense $100
EBT $400
Taxes $200
Net income $200
The firm’s bonds are all 20-year bonds with a coupon rate of 10% that are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stocks are selling at a P/E ratio of 9 and have a beta of 1.25. The riskfree rate is 6%.
What is the firm’s current weighted average cost of capital?