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What is ellis after-tax weighted average cost of capital

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Ellis Inc uses the CAPM security market line to estimate the hurdle rate on new investment. Ellis estimates her cost of capital based on the current 1-year Treasury yield and a 4% market risk premium over 1-year Treasuries. One-year Treasuries have annual coupon rates varying from 0% to 3.5% and a yield to maturity of 0.5%. Ellis's equity has a price-to-earnings ratio of 22, a beta of 1.25, a book value of $10 million, and a market value of $20 million. DiPietro's AAA-rated debt has a coupon rate of 4%, a book value of $4.8 million, a market value of $5 million, and the same market yield-to-maturity as comparable 1-year T-bonds. Ellis's corporate tax rate is 21%.

Problem 1: What is Ellis's after-tax weighted average cost of capital (WACC)?

Reference no: EM132906470

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