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The firm has $1,000,000 face amount of debt outstanding with a 5% coupon, a 10-year maturity and a market price of 96% of par. The firm has common equity in its balance sheet of $2,000,000. There are 100,000 shares outstanding with a market price of $30 per share. The beta on the common stock is 1.25, the risk-free rate is 2.50% per annum and the equity market risk premium is 5.50% per annum. The marginal tax rate is 25%. Use the Capital Asset Pricing Model to calculate the firm’s weighted average cost of capital.
1. What are the weights in the calculation?
2. What is the cost of debt?
3. What is the cost of equity?
4. What is the WACC?
Show step by step how to solve each of these questions with formulas and using excel.
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