Cost of Capital
If Wild Widgets, Inc., (WWI) were an all-equity firm, it would have a beta of 0.9.WWI has a target debt-to-equity ratio of 0.50.The expected return on the market portfolio is 16 percent, and Treasury bills currently yield 8 percent per annum. WWI one-year, $1,000 par value bonds carry a 7 percent annual coupon and are currently selling for $972.73.The yield on WWI’s longer term debt is equal to the yield on its one-year bonds. The corporate tax rate is 34 percent.
a. What is WWI’s cost of debt?
b. What is WWI’s cost of equity?
c. What is WWI’s weighted average cost of capital?