Question

- Given the following information, calculate the company’s WACC.

Market Cap |
3,200 |

BV of Equity |
1,800 |

BV of Debt |
1,200 |

MV of Debt |
950 |

Cost of Debt |
8.50% |

Unlevered beta |
1.28 |

Levered beta |
1.50 |

Equity risk premium |
6.50% |

Risk free rate |
2.50% |

Tax rate |
25% |

Answer #1

- As per CAPM,

where, rf = Risk free return = 2.50%

Rmp = Equity Risk Premium = 6.50%

Levered Beta = 1.50

Required Return or Cost of Equity = 2.50% + 1.50(6.50%)

Required Return or Cost of Equity = 12.25%

- Cost of Debt = 8.50%

- Total market Value of Equity = $3200

- Total market Value of Debt = $950

Total Capital Structure = $3200 + $950 = $4150

Calculating WACC:-

WACC= (Weight of Debt)(Cost of Debt)(1-Tax Rate) + (Weight of Equity)(Cost of Equity)

WACC = ($950/$4150)(8.50%)(1-0.25) + ($3200/$4150)(12.25%)

WACC = 1.4593% + 9.4458%

**WACC = 10.91%**

SO, the company’s WACC is 10.91%

*If you need any clarification, you can ask in
comments. *

**If you like my answer, then please up-vote as it
will be motivating *** *

(i) Mary has calculated the cost of capital (WACC) for WOW to be
7.1%, using an after-tax cost of debt of 2.8% and a cost of equity
of 7.5% (there are no preferred shares in the company). What is the
debt-to-capital ratio implied in Mary’s WACC calculation? .
(ii) Using the information from part (d), what is the levered
beta used by Mary if the current risk-free rate is 2.7% and the
risk premium is 5.6%? How do you interpret...

Given the following information for Framingham Power Co., find
the WACC. Assume the company’s tax rate is 35 percent. Debt:
$10,000,000 6 percent coupon bonds outstanding, 25 years to
maturity, selling for 92 percent of par; the bonds make annual
payments. Common Stock: 200,000 shares outstanding, selling for $49
per share; the beta is 1.4. Market: 8 percent market risk premium
and 4 percent risk-free rate.
WACC=

A private firm has equity of 4000 and debt of 1000 (book values)
and a FCFF of 100. The risk premium is 6%, the risk-free rate 3%
and the corporate tax rate 30%. Cost of debt is 4% and the expected
growth rate of FCFF is 2% forever. The firm operates in a sector
with an unlevered beta of 0.5. Assume that the book and market
values of debt are the same. Find the “market” value of equity that
produces...

US Robotics Inc. has a current capital structure of 30% debt and
70% equity. Its current before-tax cost of debt is 6%, and its tax
rate is 25%. It currently has a levered beta of 1.10. The risk-free
rate is 3%, and the risk premium on the market is 7.5%. US Robotics
Inc. is considering changing its capital structure to 60% debt and
40% equity. Increasing the firm’s level of debt will cause its
before-tax cost of debt to increase...

Calculate the following:
The cost of equity if the risk-free rate is 2%, the market
risk premium is 8%, and the beta for the company is 1.3.
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...

12. Given the following information for Watson Power Co.,
find the WACC. Assume the company’s tax rate is 35
percent.
Debt: 10,000 6.4 percent coupon bonds outstanding, $1,000 par
value, 25 years to maturity, selling for 108 percent of par; the
bonds make semiannual payments.
Common stock: 495,000 shares outstanding, selling for $63 per
share; the beta is 1.15.
Preferred stock: 35,000 shares of 3.5 percent preferred stock
outstanding, currently selling for $72 per share. Market: 7 percent
market risk...

Isabella Publishing's tax rate is 21%, its beta is 1.40, and it
currently has no debt. The CFO is considering moving to a capital
structure with 25% debt and 75% equity and using the newly raised
capital to repurchase shares of the common stock. If the risk-free
rate is 4.5% and the market risk premium is 7.0%, by how much would
the cost of equity for the levered firm increase, compared to the
cost of equity of the unlevered firm?...

Daves Inc. recently hired you as a consultant to estimate the
company’s WACC. You have obtained the following information. (1)
The firm's bonds have a YTM of 6%. (2) The company’s tax rate is
30%. (3) The risk-free rate is 4%, the market risk premium is 5%,
and the stock’s beta is 1.10. (4) The target capital structure
consists of 30% debt and the balance is common equity. The firm
uses the CAPM to estimate the cost of common stock,...

Chelsea’s rentals recently hired you as a consultant to estimate
the company’s WACC. You have obtained the following information.
(1) The firm's noncallable bonds mature in 15 years, have an 7.50%
annual coupon, a par value of $1,000, and a market price of
$1,075.00. (2) The company’s tax rate is 40%. (3) The risk-free
rate is 2.50%, the market risk premium is 6.50%, and the stock’s
beta is 1.30. (4) The target capital structure consists of 35%
debt, 10% preferred...

Candy Land Corp. has a WACC of 12.17%. The company’s equity beta
is 1.3, and its semi-annual coupon bonds have a yield-to-maturity
of 8.8% (APR, semi-annually compounded). The risk-free rate is 4%,
the expected return on the market portfolio is 11.5%, and the tax
rate is 35%. What is Candy Land’s debt-to-equity (D/E) ratio?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 7 minutes ago

asked 15 minutes ago

asked 18 minutes ago

asked 24 minutes ago

asked 28 minutes ago

asked 31 minutes ago

asked 33 minutes ago

asked 40 minutes ago

asked 55 minutes ago

asked 56 minutes ago

asked 56 minutes ago