example 1

# example 1 - of debt by the tax shield (1-t) in the WACC...

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Make-A-Friend Example #1 Suppose you need the WACC for  a firm that is financed with  50%  equity  and  50% debt .  The firm  can  borrow at 12% .  The long- term T-bond rate is  6% , the  equity risk premium is  5% , the  micro-cap risk premium is  3%  and the liquidity risk premium  (i.e. the start-up risk premium)  is  4% .  Assume a marginal tax  rate of  40% .   Find the WACC.  * The Cost of Debt The pretax cost of debt is  simply the borrowing cost for  the firm.   In this case,  12%.

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We will multiply this pretax cost
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Unformatted text preview: of debt by the tax shield (1-t) in the WACC formula to determine the after tax cost of debt. * The Cost of Equity Use the BUILD-UP METHOD: Treasury Bond Rate = 6% +Equity Risk Premium = 5% +Micro-Cap Premium = 3% +Liquidity (i.e. Start-Up) Premium = 4% Cost of Equity = 18% * Calculate the WACC WACC = [(weight D )* k D *(1-T)] + (weight E )* k E = [(0.5)*12%*(1-0.4)] + (0.5)*18% = 3.6% + 9% = 12.6%...
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## This note was uploaded on 11/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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example 1 - of debt by the tax shield (1-t) in the WACC...

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