Question

The WACC IS 4.40%. Please explain with formulas .

22. CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor. Suppose the firm faces a tax rate of 35% and collects the following informa- tion. If it plans to finance 11% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.8%, a risk-free rate of 396, and a risk premium of 6%. CoffeeStop BF Liquors Beta 0.61 0.26 % Equity 96% 89% % Debt 4% 11%

Answer 1

WACC=(wt of debt*after tax cost of debt)+(Wt of equity*cost of equity)
Cost of equity= Risk free+*beta*risk premium)
=3%+(0.26*6%)=4.56%
=(11%*4.8%*(1-35%))+(89%*4.56%)
=4.40%