Suppose your firm has a cost of debt of 7% and a debt to equity...
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Finance
Suppose your firm has a cost of debt of 7% and a debt to equity ratio of 1:1. Your firms Beta is 1.8, the current 5-year Treasury Yield is 3%, and you estimate that the equity risk premium is 6%. You are considering a five-year project that has the following cashflows and default probabilities:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| CF | -200 | 0 | 40 | 60 | 90 | 300 |
| Pr(Default) | 0 | 0 | 0.3 | 0.3 | 0.3 | 0.3 |
What is the weighted average cost of capital for the firm? (Report your answer as a percent (i.e. 4% = 4).
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