A firm’s target capital structure is 35% debt and 65% common…
A firm’s target capital structure is 35% debt and 65% common equity, with no preferred stock. Its noncallable bonds carry a 7% annual coupon and currently sell at par, so their yield to maturity is 7%. The tax rate is 25%. The firm estimates its cost of common equity with the CAPM: the risk-free rate is 4.5%, the market risk premium is 5.5%, and the stock’s beta is 1.20. What is the firm’s WACC?