1. A friend that has a mid-sized company has hired you as a consultant. She wants you to calculate the WACC for her firm. She gives you the following information:
Debt: The firm has face value of $150,000,000 outstanding of zero coupon debt with a maturity of 10 years. The current yield to maturity on similar debt is 4.20%.
Equity: The firm has 70 million shares of stock outstanding trading at $10 per share. The company’s tax rate is 35%. The firm’s beta is 1.2, the expected return on the market is 7%, and the risk free rate is 1.50%. What is the WACC of the company?
a. 7.432%
b. 7.15%
c. 7.616%
d. Not enough information
2. Wal-Mart’s equity beta is 1.2, its debt-to-equity ratio is 0.4, and it borrows at the risk-free rate of 6%. The corporate tax rate is 34%. The expected return on the market portfolio is 12%. What is Walmart’s WACC if the tax rate is zero?
a. 9.50 percent b. 13.20 percent c. 10.56 percent d. 11.14 percent e. None of the above