Company XYZ's cost of equity is 15.35% and the average YTM (yield to maturity) on its current bonds is 7.84%. The market values of XYZ's equity and debt are $4 billion and $1.1 billion, respectively. Assuming a corporate tax rate of 25%, what is the company's WACC (weighted average cost of capital)?
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Step 1
Calculate the cost of debt: The after-tax cost of debt can be calculated as follows: After-tax cost of debt = YTM x (1 - tax rate) After-tax cost of debt = 7.84% x (1 - 0.25) After-tax cost of debt = 5.88% Show more…
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