To estimate the company's WACC, Marshall Inc. recently hired you as a consultant. You have obtained...

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Finance

To estimate the company's WACC, Marshall Inc. recently hiredyou as a consultant. You have obtained the followinginformation.
(1) The firm's existing noncallablebonds which mature in 40 years, have an 5.00% annual coupon, a parvalue of $1,000, and a market price of $950. You have done someresearch and estimate the cost of issuing additional debt wouldcost you similarly to the existing bonds.
(2) The company's current tax rate is40%, but the tax rate is estimated to go up to 35% very soon.
(3) The projected future risk-freerate is 2.50%. The market return is predicted to be 7.50%. Thestock's historical beta is 1.52, as some uncertainty resolved, it’sexpected to decrease to 1.20.
(4) The target capital structureconsists of 25% debt and the balance is common equity. While basedon the book value, debt accounts for 10% and equity accounts for90%.
The firm uses CAPM to estimate thecost of common stock, and it does not expect to issue any newshares.
What is its WACC given all aboveinformation?

Answer & Explanation Solved by verified expert

4.2 Ratings (636 Votes)

Working 1 Calculation of expected cost of common stock using CAPM Cost of stock Rf Beta Rm Rf Here Rf Risk free return 250 or 0025 Rm Market rate 750 or 0075 Beta Expected 120 Now put the values into the formula Cost of stock 0025 120 0075 0025 Cost of stock 0025 006 Cost of See Answer

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Transcribed Image Text

To estimate the company's WACC, Marshall Inc. recently hiredyou as a consultant. You have obtained the followinginformation.(1) The firm's existing noncallablebonds which mature in 40 years, have an 5.00% annual coupon, a parvalue of $1,000, and a market price of $950. You have done someresearch and estimate the cost of issuing additional debt wouldcost you similarly to the existing bonds.(2) The company's current tax rate is40%, but the tax rate is estimated to go up to 35% very soon.(3) The projected future risk-freerate is 2.50%. The market return is predicted to be 7.50%. Thestock's historical beta is 1.52, as some uncertainty resolved, it’sexpected to decrease to 1.20.(4) The target capital structureconsists of 25% debt and the balance is common equity. While basedon the book value, debt accounts for 10% and equity accounts for90%.The firm uses CAPM to estimate thecost of common stock, and it does not expect to issue any newshares.What is its WACC given all aboveinformation?