You have joined the corporate finance department of Premium Meats, a food processing firm that is privately held (i.e. its shares do not trade on a stock exchange). Your manager has asked you to calculate the firms WACC, using the Capital Asset Pricing Model to estimate the cost of equity.

The debt/equity ratio of Premium Meats is 50%. The interest rate on Premium Meats debt is 6%. The corporate tax rate is 27%. You have estimated the risk-free rate to be 1.5% and the expected return on the market to be 6%.

You need an estimate of equity beta for Premium Meats. You believe that Specialty Meats, which is publicly traded, is a comparable firm and has the same business mix as your company. The equity beta of Specialty Meats is 0.9. Specialty Meats has a debt/equity ratio of 38%. (Hint: find asset beta of Specialty Meats then adjust for the leverage of Premium Meats)

Calculate the WACC for Premium Meats

Steps:

• Estimate the capital structure of Premium Meats
• Find the equity beta of Premium Meats to use in the CAPM equation