Question

Brutus Co. is a private firm. A potential project requires an investment of $625,000, and the firm borrows $350,000 at 9%. The firm's equity risk is similar to PCL Construction, a public firm with a beta of 1.75. The risk-free rate is 2% and the market risk premium is 6%. What is the firm's WACC?

Answer 1

Answer:

the WACC is 9.532%

Explanation:

The computation of the WACC is shown below;

But before that following computation needs to be done

After tax cost of debt

= 9% × (1 - tax rate)

= 9% × (1 - 0.2)

= 7.2%

Now

Cost of equity is

= Risk free rate + Beta × market risk premium

= 2% + (1.75 × 6)

= 12.5%

Now

Value of equity is

= $625,000 - $350,000

= $275000

And finally

WACC is

= Respective cost × Respective weight

= ($350,000 ÷ 625,000 × 7.2%) + ($275,000 ÷ $625,000 × 12.5%)

= 9.532%

Hence, the WACC is 9.532%