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What would be the firm weighted average cost of capital

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Reference no: EM132760313

Consider that you are the CEO of Bubbles Star Ltd. You have decided to change the composition of your firm's capital structure, and are evaluating how much your company can afford to borrow.

  • There are currently 7.5 million shares outstanding in your firm and the market price is £100 per share. The market value of the firm's outstanding debt is currently £200 million. You are rated presently as BBB.
  • The stock of the firm has a beta of 1.45. The risk-free rate is 5%. The firm faces a marginal tax-rate of 35%. The market premium is equal to 6%.
  • You estimate that if you borrow £100 million more, the rating of your company will change to B. The current BBB rate is 10% while the B rate is 12%.

Problem a) What would be the firm's weighted average cost of capital after the additional borrowing?

Reference no: EM132760313

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