Amgel Manufacturing Company’s current capital
structure is compromised of 30% debt and 70% equity (based on market
values). Amgel’s equity beta (based on its current level of debt
financing) is 1.20, and its debt beta is 0.29. Also, the risk free rate
of interest is currently 4.5% on long term government bonds. Amgel’s
investment banker advised the firm that, according to its estimated, the
market risk premium is 5.25%.
A. What is your estimate of the cost of equity
capital for Amgel (based on the CAPM)?
B. If Amgel’s marginal tax rate is 35%, what is the
firm’s overall weighted average cost of capital (WACC)?
C. Amgel is considering a major expansion of its current business operations. The firm’s investment banker estimates that Amgel will be able to borrow up to 40% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for this project
