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Calculate the cost of capital for operations (WACC) for ACME, Inc.

Question

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.

 
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