ABC Corp. is a firm with all equity financing. Its equity beta is .80. The treasury bill rate is 4% and the market risk premium is expected to be 10%. What is ABC's asset beta? What is its weighted average cost of capital? The firm is exempt from paying taxes. If you can show your calculations I'd appreciate it.
manalelkhoshkhany
Favorite Answer
Beta of an asset = (weight of debt x Beta of Debt) + (weight of equity x Beta of equity)
Since this is an all equity firm, the weight of equity = 1 (100%)
Beta of ABC's asset = 1 x 0.8 = 0.8
Using CAPM:
Cost of equity = Risk Free Rate + Beta (Market Premium)
= 4 + (0.8 x 10)
= 12%
Since ABC is an All Equity firm, WACC = Cost of Equity = 12%
Hope this helps