Question

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%

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%

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