The market value of NPU Ice Creamery equity is $8 million and the market value o
ID: 2640074 • Letter: T
Question
The market value of NPU Ice Creamery equity is $8 million and the market value of its debt is $6 million, with book value of debt at $2 million and the book value of equity at $2.5 million. The CFO estimates that the beta of the stock current is 1.43 and that the expected risk premium on the market is 8%. The Treasury bill rate is 3%. The coupon rate on the company's debt is 5%, and the Yield to Maturity is 5.5%.
Required: Estimate the Weighted Average Cost of Capital assuming a tax rate of 40%.
Show all the calculation (if possible in excel)
Explanation / Answer
Weights Book Vale of debt 2 Miilion $ 44.44% Book Vale of Equity 2.5 Miilion $ 55.56% Beta 1.43 Market risk premium (MRP) 8% Risk Free rate (RF) 3% Calculation of Cost of Equity by CAPM Model Ke = RF + Beta(MRP) Hence Weights WACC Cost of Equity 14.44% 44.44% 6.42% Cost of debt 5.50% 55.56% 3.06% Weighted Average cost = 9.47%
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