Big Red Trucking (BRT) currently provides trucking and storage services to an upper-midwest clientele. BRT is considering an expansion of its geographic coverage into the northeastern US markets. Exploring opportunities other than building entirely new facilities, BRT has identified a privately held acquisition target, Northeastern Transportation. Northeastern's business is identical to BRT's. Therefore, BRT plans to value Northeastern's cash flows using its own WACC.

Currently, BRT has a $260 million commercial bank loan at 9.70%. BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share. The beta for BRT's stock is estimated to be 1.82. BRT is in the 35% tax bracket.

The risk-free rate is 6.35% and the market risk premium is 5.00%. Answer the first eight questions using this information.

#1 We know that: -- BRT has a $260 million commercial bank loan at 9.70%. -- BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share. -- BRT's enterprise value is $1 billion. -- The beta for BRT's stock is estimated to be 1.82. -- BRT is in the 35% tax bracket. -- The risk-free rate is 6.35%. -- The market risk premium is 5.00%.

To find the WACC, we need to know the percentage of enterprise value attributable to equity. What percentage of BRT's enterprise value is attributable to equity?

a. 14%

b. 16%

c. 26%

d. 74%

#2 We know that:

• BRT has a $260 million commercial bank loan at 9.70%.
• BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
• BRT's enterprise value is $1 billion.
• The beta for BRT's stock is estimated to be 1.82.
• BRT is in the 35% tax bracket.
• The risk-free rate is 6.35%.
• The market risk premium is 5.00%.

What is BRT's after-tax cost of debt?

a. 6.3%

b. 9.7%

c. 35%

d. 74%

#3 We know that:

• BRT has a $260 million commercial bank loan at 9.70%.
• BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
• BRT's enterprise value is $1 billion.
• The beta for BRT's stock is estimated to be 1.82.
• BRT is in the 35% tax bracket.
• The risk-free rate is 6.35%.
• The market risk premium is 5.00%.

What is the rate required by BRT's equity holders?

a. 6.30%

b. 15.35%

c. 5%

d. 74%

#4 We know that:

• BRT has a $260 million commercial bank loan at 9.70%.
• BRT has 20 million shares of common stock outstanding with a current price of $37.00 per share.
• BRT's enterprise value is $1 billion.
• rE = 15.35%
• rD(1-Tc) = 6.3%
• The beta for BRT's stock is estimated to be 1.82.
• BRT is in the 35% tax bracket.
• The risk-free rate is 6.35%.
• The market risk premium is 5.00%.

What is BRT's WACC?

a. 13%

b. 26%

c. 35%

d. 74%