Question

1. We have the following information for Anheuser-Busch Companies, Inc Company Beta Market Market Bond Value Value Rating of of Debt Equity 40605 5375 Anheuser-0.5 Busch Assuming no tax is paid. Furthermore, we have the following economy-wide information Government Bond yields 10-year 4.5% Bond yield spreads (ie. bond yield -risk free rate) for A+ rating 10-year 1.00% Assume that the expected return on the S&P 500 is 10%. Estimate Anheuser-Busch's WACC using this information. 2. Identical Twin Beer, Co. has exactly the same business risk as Anheuser-Busch, but it has 100% of equity and no debt. According to the data in question 1. what is the beta of Identical Twin? What is its cost of capital?

Answer both questions please!

Answer 1

1) Since the ten year government bond yield 4.5% Bond yiled spread = 1% Bond Yield -risk free rate = 1% risk free rate = 4.5% -1% = 3.50% The cost of debt of the company would be Government yield + yield spread for A+ rating 4.5% + 1% 5.50% Cost of equity for the company = risk free rate + Beta*(Market return -risk free rate) 3.5 +0.5*(10-3.5) 6.75 WACC 6.75*(40605/(40605+5375)) +5.5*(5375/(40605+5375)) 6.60 %

2) To calculate the cost of equity for this we will have to first calculate the unlevered beta Unlevered beta = Levered beta/(1+(1-tax rate) *debt/equity) Debt/ equity = (5375/40605) Since the tax rate is zero, Unlevered beta = 0.5/(1+(1-0)*(5375/40605)) 0.44 the beta of identical twin is 0.44 The cost of capital since they are fully equity funded is 3.5 +0.44*(10-3.5) 6.36 %