1] | Unlevering equity beta of industry: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unlevered equity beta = Levered equity beta/[1+(1-t)*D/E | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
= 1.40/(1+0.66*0.35) = | 1.14 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2] | The second step is to relever the unlevered industry equity beta to suit the target debt equity ratio of Blue Angel. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Levered equity beta = Unlevered equity beta*[1+(1-t)*D/E | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
= 1.14*(1+0.66*0.40) = | 1.44 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3] | Cost equity of Blue Angel per CAPM = 5%+1.44*7% = | 15.08% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
After tax cost of debt of Blue Angel = 5%*(1-34%) = | 3.30% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
WACC of Blue Angel at target debt equity ratio = 3.30%*0.40/1.4+15.08%*1/1.4 = | 11.71% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As target debt equity ratio is 0.40, debt is 0.40 and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
equity is 1. So weight of debt = 0.40/1.4 and weight | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of equity is 1/1.4. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project....
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