Question

- Watta Corp has a beta of .80. The market risk premium is 6%, and the risk-free rate is 6%. Watta’s last dividend was $20 per share, and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $45 per share. What’s Watta’s cost of equity capital?
- From worksheet 1 chapter 14, suppose Watta Corp from #5 has a target debt-equity ratio of 50%. Its cost of debt is 9% before taxes. If the tax rate is 35%, what is the WACC? This is all the information given.

Answer #1

As per CAPM =

= 6% + 0.80 (6%)

= 10.8%

As per Dividend Growth Model

Value of Stock =

45 =

Rate of Return * 45 - 0.08 * 45 = 21.6

Rate of Return * 45 - 3.6 = 21.6

Rate of Return = (21.6 + 3.6) / 45

Rate of Return = 56% (this Rate of Retrun is too high)

Now,

Debt is 0.5

Equity is 1

Total is 1.5

WACC = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt)

= 10.8% * 1 / 1.5 + 9(1-0.35) * 0.5 / 1.5

= 7.2% + 1.95%

= 9.15%

Suppose stock of Company ABC has a beta of 1.2. The risk premium
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Stock in Country Road Industries has a beta of 0.87. The market
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Stock in Daenerys Industries has a beta of 1.27. The market risk
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50 million shares
$80 per share
Beta = 1.11
Market risk premium = 7%
Risk-free rate = 2%
Debt Information
$1 billion in outstanding debt (face value)
Current quote = 108
Coupon rate = 9%, semiannual coupons
15 years to maturity
Tax rate =35%
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Market Risk Premium = 6%
Beta = 6.0% (
NO NEED to Unlever Beta)
Risk-Free Rate = 3.16% (2009) and 3.69% (2010)
Years to Maturity for 2032 Bond = 22 years (hence 44 coupon
payments when
computing 2009 WACC; 42 coupon payments when computing the 2010
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Years to Maturity for 2011 Bond = 3.5 years (hence 7 coupon
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the 2009 WACC; 5 coupon payments when computing...

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The cost of equity if the risk-free rate is 2%, the market
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The cost of equity if the company paid a dividend of $2 last
year and is expected to grow at a constant rate of 7%. The stock
price is currently $40.
The weighted average cost of capital (WACC) if the company has
a total value of $1 million with a market value of...

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