Question

Your friend Toni, is interning in the CFO’s office at Frys. Shares of Frys are currently trading at $22, and the firm has 800 million shares outstanding. Toni estimates that Frys beta is 1.04; the current yield-to-maturity on T-Bills is 1.7%, and the return on the market is 11.2%. Further, market value of Frys’ long-term debt is $9.5 billion and has a yield-to-maturity of 7%. Fry’s marginal tax rate is 35%.

What is Fry’s WACC?

Group of answer choices

11.58%

8.39%

10.55%

9.12%

Answer 1

Market Value of Equity = Share Price * Shares Outstanding

= $22 * 800 million = $17.6 billion

Total Market Value = Market Value of Equity + Market Value of Debt

= $17.6 billion +$9.5 billion = $27.1 billion

According to the CAPM,

kE = rF + [beta * (Market Return - rF)]

= 1.7% + [1.04 * (11.2% - 1.7%)]

= 1.7% + 9.88% = 11.58%

WACC = [wD * kD * (1 - t)] + [wE * kE]

= [(9.5/27.1) * 7% * (1 - 0.35)] + [(17.6/27.1) * 11.58%]

= 1.60% + 7.52% = 9.12%

So, 4th option is correct.