Wool express (we) has a capital structure of 30% debt and 70% equity. we is considering a project that requires an investment of$2.6 million. to finance this project, we plans to issue 10-year bonds with a coupon interest rate of 12%. each of these bonds has a $1,000 face value and will be sold to net we $980. if the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for we? assume we has a beta of 1.20 and a marginal tax rate of 40%.

13.41%

Explanation:

Given:

Weight of debt =30% ; Weight of equity =70%; Coupon rate =12%

Risk-free rate, =7% ; Expected market rate, =14.5% ; Beta, = 1.20; Tax-Rate, =40%

We can calculate the following thus;

Return on bond = %

Cost of debt =Return on bond *(1-)=12.24% *(1-0.4)

                     =12.24%*0.6 = 7.35%

To compute the cost of equity capital , we shall use the CAPM formula below

                 = 7% + 1.2(14.5%-7.0%)

                  = 7% +1.20( 7.5%) = 7% + 9% = 16%

The Weighted Average Cost of Capital, WACC is worked out as

WACC= (Weight of debt*Cost of debt) + (Weight of equity *Cost of equity)

           = (30% *7.35) +(70% *16)

           = 13.405

           = 13.41%

answer; /// i believe the correct answer is (all of the above);

i might look it up later.