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What is meant by weighted average cost of capital

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Question: The activities of New Corp are financed by both debt and equity. New Corp has 3 million shares of ordinary equity outstanding, currently selling for €37 per share. The ordinary equity has a beta of 1.61. They also have 1 million 8 per cent preference shares outstanding that currently sell for €60 per share. New Corp has 90,000 bonds outstanding that are selling at par (€1,000). Equally risky bonds on the market are currently yielding 5.75 per cent.

a. The following information is also available. The government T-bill is currently yielding 2.4 per cent, the rate of return on the market, Rm is 12 per cent, and the corporate tax rate is 20 per cent. What is the firm's weighted average cost of capital (WACC)?

b. Explain what is meant by (i) the weighted average cost of capital and (ii) the return on invested capital (ROIC). How are the two concepts related?

Reference no: EM132748889

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