Blues, Inc., is an MNC located in the United States. Blues would like to estimat
ID: 2710590 • Letter: B
Question
Blues, Inc., is an MNC located in the United States. Blues would like to estimate its weighted average cost of capital. On average, bonds issued by Blues yield 9%. Currently, Treasury security rates are 3%. Furthermore, Blues' stock has a beta of 1.5, and the return on the Wilshire 5000 stock index is expected to be 10%. Blues' target capital structure is 30% debt and 70% equity. If Blues is in the 35% tax bracket, what is its weighted average cost of capital?
15.30%
13.45%
11.21%
9.32%
You gave me the answer of 15.30, which is what I came up with as well, but this is wrong, as I've been told that the CAPM isn't correctly calculated.
15.30%
13.45%
11.21%
9.32%
You gave me the answer of 15.30, which is what I came up with as well, but this is wrong, as I've been told that the CAPM isn't correctly calculated.
Explanation / Answer
WACC= (weightage of debt * cost of debt)+(weightage of equity * cost of equity)
Cost of debt:
=9%(1-tax rate)
=9%*(1-.35)
=5.85%
Cost of Equity:
Return = Rf+B(Rm-Rf)
=3%+1.5*(10%-3%)
=13.5%
WACC=(0.3*5.85%)+(0.7*13.5%)
=11.21%