Question

5- On?line broker Swab?Qtips has a beta of? 1.1, and its market return and risk?free

rates are? 15% and? 5%, respectively. What is? Swab's cost of? equity?

3- Colt Manufacturing has two? divisions: 1)? pistols; and? 2) rifles. Betas for the two divisions have been determined to be beta ?(pistol)equals=0.5 and beta ?(rifle)equals=1.0. The current? risk-free rate of return is 3.5?%, and the expected market rate of return is 7.5%. The? after-tax cost of debt for Colt is 4.5?%. The pistol? division's financial proportions are 42.5?% debt and 57.5?% ?equity, and the rifle? division's are 52.5?% debt and 47.5?% equity. a. What is the pistol? division's WACC? b. What is the rifle? division's WACC?

Answer 1

Pb 5:

Cost of Equity = Rf + beta ( Rm - Rf)

= 5% + 1.1 ( 15% - 5%)

= 5% + 1.1 (10%)

= 5% + 11%

= 16%

Pb 3:

COst of Equity of Pistol = Rf + beta ( Rm - Rf)

= 3.5% + 0.5 ( 7.5% - 3.5%)

= 3.5% + 0.5 (4%)

= 3.5% + 2%

= 5.5%

COst of Equity of Rifle = Rf + beta ( Rm - Rf)

= 3.5% + 1.0 ( 7.5% - 3.5%)

= 3.5% + 1.0 (4%)

= 3.5% + 4%

= 7.5%

WACC = Weighted Avg cost of sources in capital structure

WACC of Pistol:

WACC of Rifle: