risk free rate is 4.25%, cost of debt is 5.5%, use beta equal to 1, market risk
ID: 2784537 • Letter: R
Question
risk free rate is 4.25%, cost of debt is 5.5%, use beta equal to 1, market risk premium is 5%, cost of equity is 9.25%. Please calculate the WACC of universal mobile only.Above diagram is for weight of equity/debt.
4263 | Valuation of AirThread Connections Exhibit 7 Wireless Comparable Companies (S000's) Equity Market Value 118,497 189,470 21,079 26,285 7,360 Net Debt 69,130 79,351 5,080 8,335 3,268 Net EBIT EBIIDA Income 3,794 Com parable Com panles Universal Mobile Neuberger Wireless Agile Connections Big Country Communications Rocky Mountain Wireless Average DebtDebEquity Value Equity 36.8% 29.5% 41.9% 19.4% 24.1% 24.1% 31.7% 30.7% 44.4% 1.13 4,064 510 1,028 240 28.1% 40.1% Beta Revenue 0.86 43,882 ,79S 16,949 0.89 42,684 7,020 4,099 4.103 1.17 34,698 ,631 9,914 0.97 38,896 6,702 2.614 3,384 (30) 1.00 1) Equity betas were based on weekly stock returns calculated over a three year period. Note: the current industry and competitor leverage ratios are reflective of the historical averages that existed over the past three years.Explanation / Answer
Calculation of Weighted Average Cost of Capital (WACC)
Formula WACC = Rd (1 - T) x (D / V) + Re x (E / V)
Where,
Rd = Cost of Debt
Re = Cost of Equity
E = Market Value of Equity
D = Market Value of Debt
V = E + DT = Corporate Tax Rate
Given,
Re = Cost of Equity = 9.25%
Rd = Cost of Debt = 5.5%
Note- Tax Rate is Not given, Hence it is assumed that Given Cost of Debt of 5.5% is After Tax Adjustments.
(E / V) = 63.2 % (i.e. Total 100% - 36.8% Debt = 63.2% Equity)
(D / V) = 36.8 %
WACC = 5.5% x 36.8% + 9.25% x 63.2%
= 2.024% + 5.846%
= 7.87%
Hence, Wighted Average Cost of Capital of Universal Mobile is 7.87%
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