Question

Calculate WACC for 'F' Company

"F" Company is non-listed company, and following is the data of "F" Company
Debt %	29%
Equity %	71%
Interest Expense (Million)	90000
Total Interest bearing Debt of "F" company	890000
Market data:
Risk Free rate	2.50%
Risk Premium	6%
Tax rate	30%
Comparable Listed Companies
Company	Levered Beta	Debt	Equity
Company A	1.23	520	1125
Company B	1.31	500	868
Company C	1.15	460	787.5
Company D	1.12	600	1125
Company E	1.25	450	900
Calculate WACC for "F" Company.

Find WACC using Beta unlever and Beta lever.

Answer 1

WACC = (weight of debt * after-tax cost of debt) + (weight of equity * cost of equity)

after-tax cost of debt = (interest / total debt) * (1 - tax rate) = ($90,000 / $890,000) * (1 - 30%) = 7.08%

cost of equity = risk free rate + (beta * risk premium)

Beta is calculated by taking the average unlevered beta of the comparable companies, and relevering the average beta for "F" Company.

Unlevered beta = levered beta / (1 + (1 - tax rate) * (debt / equity))

Average unlevered beta of the comparable companies = 0.88412

Levered beta = unlevered beta * (1 + (1 - tax rate) * (debt / equity))

Levered beta of "F" Company = 0.88412 * (1 + (1 - 30%) * (29% / 71%))

Levered beta of "F" Company = 1.1369

cost of equity = 2.5% + (1.1369 * 6%) = 9.3214%

WACC = (weight of debt * after-tax cost of debt) + (weight of equity * cost of equity)

WACC = (29% * 7.08%) + (71% * 9.3214%)

WACC = 8.6714%