Question

Anker Inc. is a listed company in New York. Its current before interest after-tax operating cash flow is $100 million. The cash flow is expected to grow at 6% per annum over the next three years, after which the growth will fall to 3% per annum and stay at this rate forever. The following information is also available:

Tax rate	30%
Risk-free rate	4%
Market return	12%
Equity beta	2
Cost of debt	7%
D/E	60%

Given the above data, the after-tax weighted average cost of capital (WACC) of Anker Inc. is around:

	A.	19.38%
	B.	14.34%
	C.	Not enough information to calculate
	D.	18.25%

Answer 1

1. Cost of equity using CAPM Equation = Risk Free + Beta * Market return - Risk Free)

Cost of equity using CAPM Equation = 4% + 2 *(12% - 4%)

Cost of equity using CAPM Equation = 20%

2. After tax WACC = Cost of equity * weight of equity + after tax cost of debt * weight of debt

After tax WACC = 20% * (E/(E+D)) + 7%*(1 - 0.30) * (D/(E+D))

After tax WACC = 20% * (1/(1+0.60)) + 7%*(1 - 0.30) * (0.60/(1+1.60))

After tax WACC = 20% * 0.625 + 7%*(1 - 0.30) * 0.375

After tax WACC = 20% * 0.625 + 4.90% * 0.375

After tax WACC = 14.34% Option B