00:03
To calculate the firm's weighted average cost of capital.
00:08
To calculate the firm's weighted average cost of capital.
00:39
We need to consider the cost of debt and the cost of equity and their respective weight in the firm's capital structure.
00:46
The wacc represents the average rate of return required by the investor to finance the company operation and the investment.
00:55
First, we will calculate the cost of debt.
00:58
Cost of debt.
01:04
So the bonds are selling at par value, so the yield to maturity is equal to the pre -tax yield of 8 .6%.
01:15
Since the interest on debt is tax deductible, we need to adjust the cost of the debt for taxes.
01:22
So the after -tax cost of debt can be calculated as follows.
01:27
So after -tax cost of debt equals to pre -tax cost of debt into tax rate, which is equals to 0 .086 into one minus zero point, which is equals to 0 .086 into 0 .79.
02:20
0 .06794, or 6 .794%.
02:34
Now let's calculate the cost of equity.
02:39
So cost of equity.
02:44
So the cost of equity can be calculated using the capital asset pricing model, capm, which can see that there is free rate, the market risk premium, and the stock's beta.
03:01
So the cost of equity equals to risk -free rate plus beta into market risk premium.
03:38
So it is equals to 0 .04 plus 1 .1 to 0 .08...
