Blues, Inc., is an MNC located in the United States. Blues would like to estimat

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%

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