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Question 2. Weighted Average Cost of Capital (10 points) The Intel Corporation has a book value of capital of $10,000,000. All of its capital is equity and has a current market value of $100,000,000. Its equity beta is 0.75. You have the following market information: The current 10-year Treasury bond rate is 4% The Market Risk Premium is 8% The tax rate if 21% a. Please estimate Intel’s Weighted Average Cost of Capital, given its current capital structure: (5points)

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TomShelby

Answer:

WACC = 10%

Explanation:

We must calcualte the CAPM

[tex]K_e= r_f + \beta (r_m-r_f)\\\\Where:\\r_f =0.04 $ risk free rate\\risk_{premium}= 0.08 = (r_m-r_f)\\\beta = 0.75 = non-diversifiable \:risk[/tex]

[tex]K_e= 0.04 + 0.75 (0.08)= 0.10[/tex]

Cost of Equity = 10%

Because there is no debt:

"All of its capital is equity"

the WACC will only consider the equity cost

WACC = cost of equity = 10%

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