1. **State the problem:** Calculate the Weighted Average Cost of Capital (WACC) for Ampex company given the following data: - Beta of common stock $\beta = 1.4$ - Risk-free rate $r_f = 0.08$ - Expected market return $r_m = 0.16$ - Debt $D = 20$ million with coupon rate 8% but yield to maturity (YTM) 12% - Marginal tax rate $T_c = 0.5$ - Debt to equity ratio $D/E = 2$ 2. **Formula for WACC:** $$ WACC = \frac{E}{V} r_e + \frac{D}{V} r_d (1 - T_c) $$ where: - $r_e$ is cost of equity - $r_d$ is cost of debt (YTM here) - $E$ is market value of equity - $D$ is market value of debt - $V = E + D$ total value of firm 3. **Calculate cost of equity $r_e$ using CAPM:** $$ r_e = r_f + \beta (r_m - r_f) = 0.08 + 1.4(0.16 - 0.08) = 0.08 + 1.4 \times 0.08 = 0.08 + 0.112 = 0.192 = 19.2\% $$ 4. **Calculate weights of debt and equity:** Given $D/E = 2$, so $D = 2E$ Total value $V = D + E = 2E + E = 3E$ Therefore: $$ \frac{E}{V} = \frac{E}{3E} = \frac{1}{3} \, , \, \frac{D}{V} = \frac{2E}{3E} = \frac{2}{3} $$ 5. **Cost of debt $r_d$ is given as YTM = 12% or 0.12** 6. **Calculate WACC:** $$ WACC = \frac{1}{3} \times 0.192 + \frac{2}{3} \times 0.12 \times (1 - 0.5) = 0.064 + 0.08 = 0.144 = 14.4\% $$ **Final answer:** The WACC of Ampex company is **14.4%**.