Question

# Given the following information, calculate the company’s WACC. Market Cap 3,200 BV of Equity 1,800 BV...

1. 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%

- 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%

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