Calculate the cost of capital for operations (WACC) for ACME, Inc. Use the capital asset pricing model to
estimate the cost of equity capital.
U.S. Government long-term bond rate 2.25%
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Market risk premium 5.50%
Equity beta 1.20
Per-share market price $100.00
Shares outstanding 12.5 million
Net financial obligations on balance sheet $750.5 million
Weighted-average borrowing cost 6.0%
Statutory tax rate 35.0%
3. Given your answer above in 2 and equation 14.6 from the Penman textbook, it appears that the cost of capital for operations, ρF, is a function of the cost of equity capital, ρE. Does the equity cost of capital determine the firm’s cost of capital? Explain briefly.