*The capital structure is 40% debt and 60% equity. *The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket. *The firm’s beta is 1.7.
*The capital structure is 40% debt and 60% equity. *The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket. *The firm’s beta is 1.7.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Calculate the weighted average cost of capital for Limp Linguini Noodle Makers Inc. under the following conditions:
*The capital structure is 40% debt and 60% equity.
*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket.
*The firm’s beta is 1.7.
*The risk-free rate is 7% and the market risk premium is 6%.
a. 15.12%
b. 12%
c. 17.2%
d. 18.7%
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