Question 1 Weighted Average Cost of Capital (WACC) (15 marks)

For percentages, use 4 decimals: example 0.0562 = 5.62% (to change the number of decimals displayed on your calculator: press 2^nd Format). Round dollars amounts to the nearest dollar (no decimals).

Using the following information and the 2019 financial statements, calculate Thalassa Cosmetics WACC.

Short-term debt is permanent in nature. The company currently pays 6.25%. Short-term debt is valued at par (ignore flotation costs for short-term debt). Long-term debt consists of 15 year 6.85% coupon bond paid semi-annually. The bonds currently trade at 102.20. Flotation cost for long-term debt equals 1%.

Market value debt- to - equity ratio is 0.6:1 (with debt = short term and long term interest paying debt)

Thalassa Cosmetics shares are not listed, but similar public companies have a beta equal to 1.4. Main brokerage houses expect the market risk premium to be 3.6%. Assume that no new equity would be issued. To estimate the cost of equity, only use the CAPM approach.

1-year Canadian government bonds are yielding 5%

10-year Canadian government bonds are yielding 5.6%

Inflation is currently running at 1.2%.

To receive full marks, show all your calculations hereafter.