Question

Backroads uses the CAPM to estimate its cost of common equity, rs. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that if it had no debt, its "unlevered" beta, bU, would be 1.25. On the basis of this information, what would be the WACC at the optimal capital structure?

Answer 1

WACC = 12.25%

Step-by-step explanation:

`Ke= r_f + \beta (r_m-r_f)`

risk free 0.06

market rate

premium market market rate - risk free 0.05

beta(non diversifiable risk) 1.25

`Ke= 0.06 + 1.25 (0.05)`

Ke 0.12250

The firm is unlevered, which means it has no debt, so the WACC wll be compose only for the cost of equity