Question
You work for a firm that is looking to raise capital in the near future. As part of your work to prepare for potential investors,
You work for a firm that is looking to raise capital in the near future. As part of your work to prepare for potential investors, you determined that you need to compute the WACC of your firm. Your firm is currently structured in such a way that the Debt-to-Equity ratio is 0.4. Assume a tax rate of 30%.
- Since your company size is comparable with publicly traded micro-cap companies, you started analyzing the Wilshire Micro-Cap ETF, which represents a basket of micro-cap companies in the US.
- Your firm considers the 3-month Government T-Bills as the risk-free investment.
Based on the price data answer the following questions.
- Cost of Equity:
- What was the annualized return for the reference micro-cap ETF?
- During the period considered, what was the risk premium of micro-cap stocks?
Historically your company has produced equity returns that indicate a beta to the general micro-cap market of around 1.25.
- Assuming the beta will remain stable, what should your cost of equity be?
- Cost of Debt:
Your only debt outstanding in the market is a single bond with the following parameters:
- 10 yrs until maturity
- semiannual coupons with an (annual) coupon rate of 7%
- a current market price of 95 (as a percentage of the notional amount)
What is your cost of debt?
- Given the results from 1 and 2, what is your firm's WACC?
| Date | Wilshire Micro-Cap ETF | Treasury Bills ETF |
| 1/2/2009 | $ 10.97 | $ 88.98 |
| 1/5/2009 | $ 11.22 | $ 88.96 |
| 1/6/2009 | $ 11.65 | $ 89.02 |
| 1/7/2009 | $ 11.15 | $ 89.04 |
| 1/8/2009 | $ 11.15 | $ 88.98 |
| 1/9/2009 | $ 11.08 | $ 89.02 |
| 1/12/2009 | $ 10.47 | $ 89.04 |
| 1/13/2009 | $ 10.68 | $ 89.02 |
| 1/14/2009 | $ 10.68 | $ 89.06 |
| 1/15/2009 | $ 9.77 | $ 89.04 |
| 1/16/2009 | $ 10.05 | $ 89.06 |
| 1/20/2009 | $ 9.94 | $ 89.04 |
| 1/21/2009 | $ 9.94 | $ 89.00 |
| 1/22/2009 | $ 9.86 | $ 89.01 |
| 1/23/2009 | $ 9.87 | $ 88.96 |
| 1/26/2009 | $ 9.87 | $ 89.01 |
| 1/27/2009 | $ 9.97 | $ 88.99 |
| 1/28/2009 | $ 9.97 | $ 88.99 |
| 1/29/2009 | $ 9.99 | $ 89.03 |
| 1/30/2009 | $ 9.99 | $ 88.98 |
| 2/2/2009 | $ 9.99 | $ 89.03 |
| 2/3/2009 | $ 9.73 | $ 88.99 |
| 2/4/2009 | $ 9.72 | $ 88.99 |
| 2/5/2009 | $ 9.72 | $ 89.05 |
| 2/6/2009 | $ 10.03 | $ 88.96 |
| 2/9/2009 | $ 10.20 | $ 88.99 |
| 2/10/2009 | $ 9.69 | $ 88.98 |
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Investing All In One
Authors: Eric Tyson
1st Edition
1119376629, 978-1119376620
