In December 1995 Boise Cascade’s stock had a beta of 0.95. The Treasury bill rat
ID: 2773607 • Letter: I
Question
In December 1995 Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8% and the Treasury bond rate was 6.4%. The firm had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate tax rate was 36%; the market risk premium is 5.5%.
Assume the term structure of interest gives a 200 bp (basis point – a basis point is 1/100 of a %) spread between Treasury securities and the yield on debt with the same rating as Boise Cascade.Calculate the firm’s WACC.
Explanation / Answer
Answer:
Expected return to short term Investor =
= 5.8% + 0.95 (8.5%) = 13.88%
Expected return to Long term Investor = 6.4% + 0.95 (5.5%) = 11.63%
I would use the expected return of 11.63%as the cost of equity.