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Problem
The American Movie Company has the following sources of financing reported on its balance sheet:
Liabilities & Equity
Book Value
Debt (13% coupon bonds, $1000 face value)
$4,000,000
Common stock, 100,000 shares
$6,000,000
Total
$10,000,000
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.
Cost of
Estimated weight of
Debt:
Common stock:
WACC =
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