Question
XYZ Corporation is financed by 30% equity and 70% by
debt. The company has an after-tax cost of debt of 9% and the beta of shares in XYZ is 2. The risk-free rate of return is 3% and the equity risk premium is 8%. What is the after-tax weighted average cost of capital of XYZ company?Solution
Cost of equity = 3% + 2 x 8% = 19% WACC = (30% x 19%) + (70% x 9%) = 12%
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