Question:

B company is a newly public firm with 20 million shares outstanding. You are doing a valuation analysis of B company and you estimate its free cash flow in the coming year to be 40 million. You expected the firms free cash flows to grow by 5% per year in subsequent year. Because the firm has only been listed on the HONG KONG Stock exchange for short time, you do not have an accurate assessment of B equity beta, However, you do have the following data for a comparable firm in the same industry:

Equity Beta: 1.7

Debt Beta 0.5

Debt-equity Ratio 1.4

B company has a much lower debt-equity ratios of 0.5, which is expected to remain stable. B company debt is risk free. The corporate tax rate is 40%, the risk free rate is 5%, and the expected return on market portfolio is 10%.

Problem:

What is B companys WACC?