Cost of Capital

You have been asked to determine a WACC for BusinessPoint, a comprehensive web hosting service fo small businesses.

BusinessPoint has a debt-to-equity ratio is lower than usual at 40%. The tax rate is 30%. Your assistant has provided you with the following information on comparable firms.

Firm

Levered Beta

D/E Ratio

Omega

1.4

0.3

Redmond

1

0.1

WhitePlains

1.2

0.2

So your next task is to determine the unlevered beta of each of these firms.

Using an average of those unlevered betas estimate a levered equity beta for BusinessPoint.

Given T-Bills are currently yielding 0.9% and the return on market is 7.2%, calculate the required return BusinessPoint's stock, according to the CAPM.

BusinessPoint, currently, has outstanding 10-year maturity bonds with a par value of $1,000 that pay a 5% annual coupon, that are selling for $970.

Calculate BusinessPoint's required return on debt.

Based on your results above, calculate the weighted average cost of capital for BusinessPoint.