Vision Inc. is financed through both debt and equity, with a D/E ratio of 0.75. The firm’s overall risk is measured at a beta of 1.3 with a cost of equity of 12 percent. The risk-free rate of return is 2.5 percent and the tax rate is 30%. The company’s debt consists of semiannual bonds, with a coupon rate of 10%. They have 10 years to maturity and currently sell for $1,000.

Cost of Capital 14.85%

WACC 8.97%

Explanation:

As the bonds sale at par their effective rate matches the coupon rate os 7.5%

the equity cost of capital is solve through CAPM:

risk free =0.025

market rate =0.12

premium market = (market rate - risk free)0.095

beta(non diversifiable risk) =1.3

Ke0.14850

And now, we solve for WACC

Ke0.14850

Equity weight0.25

Kd0.1

Debt Weight0.75

tax rate0.3

WACC8.96250%

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