A Firm Has a Capital Structure of 40% Debt and 60

question 93

Multiple Choice

A firm has a capital structure of 40% debt and 60% equity.The firm has bonds outstanding with a face value of $20 million.The bonds pay,on average,a 8% annual coupon and have an average maturity length of 7 years.The market value of the bonds is 110% of face value and the tax rate facing the firm is 40%.The firm has common stock with a beta of 1.25.The risk free rate on Treasury bonds is 2%,while the market risk premium is 8%.What is the WACC for the firm?

• A) 8.69%
• B) 9.13%
• C) 9.68%
• D) 11.15%

---

Definitions:

Net Operating Income

Represents the profit a company makes from its operational activities after subtracting operating expenses from its operating revenues.

Profit Centres

Divisions or segments of a business with direct responsibility for generating profits.

External Sales

Sales made to customers outside of the company, as opposed to internal transactions within the company.

Total Assets

The sum of all the assets owned by a company, including both current and non-current assets.