Cost of capital

1. Tech produces shoes. It has an enterprise value of 500, debt equal to 200, cost of debt equal to 5%, beta of equity of 0.8, and the corporate tax is 25%. The risk-free rate is 3% and the equity risk premium is 6%. What is Tech Wacc?

2. Suppose that Tech wants to diversify its business by acquiring for the assets of a company in the trucking industry. There are three trucking companies (Grate, Paltry and Dropa) traded in the stock market, and their information is provided in the table below. Tech finances the acquisition with the same capital structure as its shoe business (i.e.: D/EV=40%). Assuming that the corporate tax is 25%, the risk-free rate is 3% and the equity risk premium is 6%, what is the WACC that Tech should use to evaluate its investment in the trucking industry?

\begin{tabular}{|l|l|l|l|} \hline Company & Equity beta & Debt/equity Ratio & Debt beta \\ \hline Grate & 1.13 & 0.15 & 0.00 \\ \hline Paltry & 1.80 & 1.06 & 0.15 \\ \hline Dropa & 3.27 & 3.52 & 0.30 \\ \hline \end{tabular}