Question
Estimate the weighted average cost of capital (WACC). Firm's shares are worth $442 million and debt is worth $74 million. The corporate tax rate is
Estimate the weighted average cost of capital (WACC).
Firm's shares are worth $442 million and debt is worth $74 million. The corporate tax rate is 21% and the firm is able to borrow at 4.5%. The firm is projected to maintain the same ratio of debt:equity in all years. Data on a suite of comparable firms is available below.
Firm | Equity Beta | Cost of Debt | Debt ($M) | Equity ($M) |
Medialix | 0.91 | 4.7% | 24114 | 119956 |
AngloMed | 0.96 | 4.2% | 25 | 852 |
InglaterMed | 1.06 | 5% | 1546 | 3804 |
Strickland | 1.09 | 1.6% | 12479 | 83703 |
Premula | 0.91 | 4% | 28 | 7409 |
Maxitrol Intl. | 1.42 | 4.5% | 48 | 370 |
NexOl Media | 0.94 | 4.9% | 3339 | 10483 |
Apply capital asset pricing model as the model for deriving an estimate of the cost of equity, assuming that the risk-free rate is 3% and the market risk premium is 7%. You will have to account for the fact that the company's leverage is different to the leverage of comparable firms when estimating the equity component of the weighted average cost of capital.
What estimate would you give as the weighted average cost of capital?
Please show your work, I can't seem to carry through the steps without some error.
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