Question

ENDI Co. has a loan at a started rate of 6%, tax rate 40%, beta of .9, risk free rate 3%.
a. what is the cost of debt used to obtain their WACC?
b. Is ENDI considered more volatile than the market as a whole? Show work.

Answer 1

Answer : (a.) Cost of debt that will be used to obtain WACC will be after tax cost of debt i.e 3.6% i.e [Before tax cost of debt or stated rate * (1 - tax rate)] or [6% * (1 - 0.40)]

(b.) No ENDI is not considered as more volatile than the market as a whole because Beta measure volatility of a stock over the market as a whole.If the beta is less than 1, the stock has low volatility than the market or price movements are not highly related with the market as a whole. In this case since beta is 0.9 (i.e less than 1) therefore ENDI is not considered as more volatile than the market as a whole.