This data corresponds to Company B and their executives are seeking advice from a business...

Question

This data corresponds to Company B and their executives are seeking advice from a business analyst:

•
Beta = 1.1

•
Required return on debt (yield to maturity on a long-term bond) = 4%

•
Tax Rate = 21%

•
30-year government bond = 3.6%

•

Market risk premium can be assumed to be as 5%

Current capilatization (millions of dollars)

Mi

Currency

Million USD

Current Capitalization (millions of dollars)

Currency XXXXXXXXXXmillion usd

Shares Price

$ XXXXXXXXXX

Shares Outstanding

123.0

Market Capitalization

3,567.0

- Cash & Short Term Investments

59.0

+ Total Debt

927.0

+ Pref. Equity

-

+ Total Minority Interest

-

=Total Enterprise Value (TEV)

4,435.0

Book Value of Common Equity

457.0

+ Pref. Equity

-

+ Total Minority Interest

-

+ Total Debt

927.0

Total book capital

1,384.0

Estimate the cost of capital (WACC) for Company B.

WACC = ???

Show all calculations.

Prince · Accepted Answer

Cost of Equity using CAPM:
Cost of Equity = 3.6% + 1.1 (5% - 3.6%)
Cost of Equity = 3.6% + 1.1*1.4%
Cost of Equity = 3.6% + 1.54%
Cost of Equity = 5.14%
After tax Cost of Debt = 4% * (1-21%) = 3.16%
Calculation of WACC: 
	Particular
	Amount
	Weight
	Cost 
	WACC
	Debt 
	$927.00
	      0.

This data corresponds to Company B and their executives are seeking advice from a business analyst: • Beta = 1.1 • Required return on debt (yield to maturity on a long-term bond) = 4% • Tax Rate =...

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