Answer:
1. WACC = 11.26% (using classical CAPM)
2. WACC = 11.22% (using tax-adjusted CAPM)
Explanation:
The Weighted Average Cost of Capital (WACC) is the cost of capital of a firm where its equity and debt structure is proportionate.
The CAPM is two types, classic CAPM and tax-adjusted CAPM.
Classic CAPM Formula:
[tex]r_E=r_f+\beta(E_{rM}-r_f)[/tex]
Tax adjusted CAPM Formula:
[tex]r_E=r_f+\beta(E_{rM}-r_f)+T*r_f(\beta - 1)[/tex]
** same way for [tex]r_D[/tex], cost of debt
Where
[tex]r_E[/tex] is the cost of equity
[tex]r_f[/tex] risk free rate
[tex]\beta[/tex] is the volatility
[tex]E_{rM}[/tex] is the market return
T is the tax rate
Also, formula for WACC is:
WACC = [tex]E(r_E)+D(r_D)(1-T)[/tex]
Where
E is percentage of equity of the firm
D is the percentage of debt in the firm
[tex]r_E[/tex] is cost of equity
[tex]r_D[/tex] is cost of debt
T is tax rate
Now, using classical CAPM Approach:
Cost of Equity:
[tex]r_E=r_f+\beta(E_{rM}-r_f)\\r_E=0.06+1.5(0.15-0.06)\\r_E=0.195[/tex]
Cost of Debt:
[tex]r_D=r_f+\beta(E_{rM}-r_f)\\r_D=0.06+0.4(0.15-0.06)\\r_D=0.096[/tex]
WACC:
[tex]WACC=E*r_E+D*r_D(1-T)\\WACC=0.4(0.195)+0.6(0.096)(1-0.4)WACC=0.11256[/tex]
THus,
WACC = 11.26%
Using Tax adjusted CAPM:
Cost of Equity:
[tex]r_E=r_f+\beta(E_{rM}-r_f)+T*r_f(\beta - 1)\\r_E=0.06+1.5(0.15-0.06)+(0.4)(0.06)(1.5-1)\\r_E=0.207[/tex]
Cost of Debt:
[tex]r_D=r_f+\beta(E_{rM}-r_f)+T*r_f(\beta - 1)\\r_D=0.06+0.4(0.15-0.06)+0.4*0.06(0.4-1)\\r_D=0.0816[/tex]
Now, WACC:
[tex]WACC=E(r_E)+D(r_D)(1-T)\\WACC=0.4(0.207)+0.6(0.0816)(1-0.4)\\WACC=0.112176[/tex]
Thus,
WACC = 11.22%
