7. FINC 302 is a long-term debt where the face amount of each bond is GH¢ 1,000. The coupon rate is 20% to be paid semi-annually. The 5-year risk-free rate is 20% p.a. It is estimated that the risk premium appropriate to company Y is 6 percentage points

The required rate of return is the rate of return that investors expect from the stock based using the Capital Asset Pricing Model(CAPM) formula shown below:

required rate of return=risk-free rate+ risk premium

risk-free rate=20%

risk premium=6%

required rate of return=20%+6%

required rate of return=26.00%

What is WACC?

WACC means weighted average cost of capital is the sum of the cost of equity and the cost of debt multiplied by their respective weights in the firm's capital structure.

WACC=(required rate of return*weight of equity)+(cost of debt*weight of debt)

Note that there is an implicit assumption in this case that equity and debt have are 50%:50%

required rate of return=26%

cost of debt=coupon rate=20%

WACC=(26%*50%)+(20%*50%)

WACC=23.00%

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Complete question with requirement:

FINC 302 is a long term debt where face amount of each bond is GH¢ 1,000. The coupon rate is 20% to be paid semi annually. The 5-year risk free rate is 20% p.a. It is estimated that the risk premium appropriate to company Y is 6 percentage point.

Calculate the required rate of return and the WACC