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Question: ABC currently has EBIT of 200. It has CAPEX of 50 and depreciation of 40. Working capital requirements are 5. Revenues are 500. The firm is expected to grow at 10% for the next 2 years and at a stable growth rate of 3% thereafter.

ABC has book debt of 100. It's debt currently trades at 150. It has book equity of 200. It has 100 shares outstanding, each of which trades at 2.5. The firm does not know its beta. However, its direct competitor has a D/E ratio of 0.5 and a beta of 1. The tax rate is 30%. The firm's interest rate on existing debt is 6% and lenders will require a return of 5% on any future capital raisings. The risk free rate is 5% and the market risk premium is 5.5%.

(a) Calculate the firm's cost of equity

(b) Calculate the firm's WACC

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92770111

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