We= The proportion of the financing provided by equity= 47.62%
Kp= 18.75%
Kd=7%
Ke
= 11.20%
T=30%
And WACC (Ka) = Wd*(Kd)*(1-t)+(Wp)*(Kp) +(We)*(Ke)
ie wacc = 40.95%*7%*(1-30%) + 11.43%*18.75% + 47.62%*11.20%
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S ecurity
Mkt v alue
Weights
Bond
$8.60
40.95%
Pref stoock
$2.40
11.43%
C om on sock
$10.00
47.62%
T ota l
$ 2 1 .0 0
1 0 0 .0 0 %

ie WACC = 9.48%

Problem 13-19 Cost of Capital (LO3)
The total market value of Okefenokee Real Estate Company's equity is $6 million, and the total
value of its debt is $4 million. The treasurer estimates that the beta of the stock
currently is 0.5 and that the expected risk premium on the market is 12%. The
Treasury bill rate is 4%.
What is the required rate of return on Okefenokee stock?
Required rate of

return
What is the beta of the company’s existing portfolio of assets? The debt is perceived to be
virtually risk-free.
(Round your answer to 2 decimal places.)

Estimate the weighted-average cost of capital assuming a tax rate of 40%.
(Do not round
intermediate calculations. Round your answer to 2 decimal places.)

Estimate the discount rate for an expansion of the company’s present business.
(Do not
round intermediate calculations. Round your answer to 2 decimal places.)

Suppose the company wants to diversify into the manufacture of rose-colored glasses. The
beta of optical manufacturers with no debt outstanding is 0.5. What is the required
rate of return on Okefenokee’s new venture? (You should assume that the risky
project will not enable the firm to issue any additional debt.)

Problem 13-11 Calculating WACC (LO3)
The total
book value
of the firm’s equity is $16 million; book value per share is $32. The stock
sells for a price of $35 per share, and the cost of equity is 13%. The firm’s bonds
have a face value of $4 million and sell at a price of 140% of face value. The yield to
maturity on the bonds is 7%, and the firm’s tax rate is 40%. Find the WACC of
William Tell Computers.
(Do not round intermediate calculations. Round your
answer to 2 decimal places.)

Ie WACC
= (5.6/23.1)*7%*(1-40%) + (17.5/23.1)*13% = 10.87%