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How to calculate WACC?
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.
1 Answer
- 1 decade agoFavorite 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
