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Northwest Corporation is estimating its WACC. Its target capital structure is 30 percent debt and 70 percent common equity. Its bonds have a 10 percent coupon, paid semiannually, and a current maturity of 20 years. Bonds also have current market value of $1000 and par value of $1,000.
Northwest' beta is 1.45, the risk-free rate is 4 percent, and the market risk premium is 8 percent. Northwest is a constant-growth firm which just paid a dividend of $2.00, its stock sells for $23.00 per share, and has a growth rate of 4 percent. The firm's marginal tax rate is 21 percent.
a) What is Northwest' before-tax cost of debt? ________%
b) What is the firm's cost of common stock (RE) (rs) using the DCF approach?____________%
c) What is Northwest' WACC?____________________%
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