Question
no excel please, WWE is a large conglomerate thinking of entering the widget business, where it plans to finance projects w/ a debt-to-value ratio of
no excel please, WWE is a large conglomerate thinking of entering the widget business, where it plans to finance projects w/ a debt-to-value ratio of 25%(or D/E of 1/3). There is currently one firm in the widget industry, AW. This firm is financed w/ 40% debt and 60% equity. The beta of AWs equity is 1.5. AW has a borrowing rate of 12%, and WWE expects to borrow for its widget venture at 10%. The corporate tax rate for both firms is 0.40, the market premium is 8.5%, and the riskless the interest rate is 8%.
What is the WACC for WWE to use for its widget venture? (use CAPM, first. Then the two companies are in the same industry, so assume that the business risk of each would be the same)
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