example 2

example 2 - of debt by the tax shield (1-t) in the WACC...

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* Make-A-Friend Example #2 Suppose you need the WACC for  a firm that is financed with  65%  equity  and  35% debt .  The firm  can  borrow at 14% .  The long- term T-bond rate is  5.25% , the  equity risk premium is  7.5% the micro-cap risk premium is  3.75%  and the liquidity risk  premium (i.e. start-up risk  premium) is  3.5% .  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.  
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In this case,  14%. 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 = 5.25% +Equity Risk Premium = 7.50% +Micro-Cap Premium = 3.75% +Liquidity (i.e. Start-Up) Premium = 3.50% Cost of Equity = 20% * Calculate the WACC WACC = [(weight D )* k D *(1-T)] + (weight E )* k E = [(0.35)*14%*(1-0.4)] + (0.65)*20% = 2.94% + 13% = 15.94%...
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example 2 - of debt by the tax shield (1-t) in the WACC...

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