You have joined the corporate finance department of Welcome Industries, a manufacturing 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 Welcome is 75%. The interest rate on Welcome debt is 8%. The corporate tax rate is 30%. You have estimated the risk-free rate to be 3% and the expected return on the market to be 9%.

You need an estimate of equity beta for Welcome. You believe that Bluebell Corporation, which is publicly traded, is a comparable firm and has the same business mix as your company. The equity beta of Bluebell is 1.1. Bluebell has a debt/equity ratio of 50%. (Hint: find asset beta of Bluebell then adjust for the leverage of Welcome)

Steps:

Estimate the capital structure of Welcome Find the equity beta of Welcome to use in the CAPM equation

Calculate the WACC for Welcome.