Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,000.00. (2) The company's tax rate is 25%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? Do not round your intermediate calculations.

Based on the information given Daves Inc WACC is 9.32%.

First step is to find then YTM using financial calculator

PV= -$1,000

PMT= 80

N=20

FV =$1,000

Hence:

YTM=8%

Second step is to calculate the After tax cost of Debt

After tax cost of Debt = Before tax cost of debt × (1 - tax rate)

 After tax cost of Debt = 8% × (1 - 25%)

 After tax cost of Debt = 6%

Third step is to calculate the Cost of Equity

Cost of Equity =Risk free Rate + (Beta × Market Risk Premium)

Cost of Equity= 4.5% + (1.2 × 5.5%)

Cost of Equity= 11.10%

Fourth step is to calculate WACC

WACC= (.35 × 6%×)+ [(1-.35)×11.10%]

WACC=(.35×6%)+(.65×11.10%)

WACC=2.1%+7.215%

WACC=9.315%

WACC= 9.32% (Approximately)

Inconclusion Daves Inc WACC is 9.32%.

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9.315%

Explanation:

The computation of WACC is shown below:-

But before that we need to do the following calculations

PV -$1,000

PMT 80

N 20

FV $1,000

Compute IY 8%

After tax cost of Debt = Before tax cost of debt × (1 - tax rate)

= 8% × (1 - 25%)

= 6%

According to the CAPM,

Cost of Equity =Risk free Rate + (Beta × Market Risk Premium)

= 4.5% + (1.2 × 5.5%)

= 11.10%

Weight of Equity = 100% - 35%

= 65%

WACC = (Weight of Equity × Cost of Equity) + (Weight of debt × Cost of debt)

= (65% × 11.10) + (35% × 6)

= 9.315%

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