You have taken a job as an investment analyst at the InvestWell Investment fund. Your new boss has asked you to calculate the WACC of BioGroup. BioGroup is a low-cap biotech public company, its investment projects typically last 4 to 6 years in length, and it currently has a BBB- debt rating. (ALL WORK MOST BE DONE IN EXCEL)(SHOW YOUR WORK)

In order to calculate BioGroups WACC, you have been provided the following information to help you calculate BioGroups cost of debt:

Yields to maturity for U.S. Treasury bonds are currently:

5-Year: 3.75%

10-Year: 4.25%

20-Year 4.60%

Corporate debt yield spreads to U.S. Treasuries are as follows:

A-: 1.95%

BBB+: 2.45%

BBB: 2.75%

BBB-: 3.1%

Based upon analysis previously done by another investment analyst at InvestWell, your firm believes BioGroups marginal tax rate is 38% and average tax rate is 34%.

In addition, the following has been provided to help you calculate BioGroups cost of common equity:

BioGroup's common stock is currently trading at $23.50 per share, and recently paid a dividend of $1.80 per share for the year

Based upon some analysis done by another investment analyst at InvestWell, your firm believes that BioGroups dividends and earnings are expected to grow at a constant growth rate of 4.5% into the foreseeable future

BioGroup has only been public for approximately three years, and as such, no reliable third party beta calculations are available. However, you have been provided with the following information regarding one comparable company:

SuperBio Beta: 1.20, D/E: 95%

Tax rates are not available for SuperBio as such, you are to use BioGroups appropriate tax rate as a proxy for the comparable company

BioGroups target Debt-to-Value ratio (D/V) is currently 40%

A copy of the Ibbotson SBBI Valuation yearbook is located in your Week 8 Module of this course Canvas.

Finally, based upon some analysis done by your boss at InvestWell, he believes that BioGroup will need to fulfill future additional equity requirements with primarily new common stock issuances (rather than retained earnings), and expects flotation costs for such issuances to equal 5%

Based upon the information provided, determine the:

a) Cost of Debt (after-tax)

b) Cost of Common Equity (using an average of the Constant Dividend Growth and CAPM methods)

c) WACC