Our firm survives for the next 3 years and then it is dissolved (no residual value). Each of these 3 years, it earns before interest and taxes $420,000 (i.e., these are the only payoffs that shareholders will ever receive) and has already depreciated its fixed assets. It draws 25% of its financing from 3-year bonds with face value $1,000 (each) that pay an annual coupon of $50 and sell at par.
The firm has a beta of 1.2 and faces a corporate tax rate of 20%. The risk free rate is 4% and the expected market return is 14%.
What is the weighted-average cost of capital of the firm?
a.
8.5%
b.
13%
c.
16.6%
d.
10%
e.
10.5%
f.
13.25%
g.
7%
h.
14.5%