You have been asked to calculate the WACC for a new project and you have decided...

You have been asked to calculate the WACC for a new project and you have decided to use the pure play method. You determine the capital structure is 75% equity and 25% debt (i.e., E/(D+E) = 0.75). To get the cost of debt for the project you plan to use an annual bond with the following characteristics: Price is $1,000, Coupon rate is 5%, face value is $1,000 and it has 10 years to maturity. To get the cost of equity for the factory you plan to use the “pure-play” method and information from the following comparable firm: The comparable firm’s Beta (BL) is 1.5; its tax rate is 20%, and its D/E is 1.00. The T-bond rate is 1.00%, the market risk premium (MRP) is 5%, and the tax rate for your company is 25%
What is the beta you would use in the CAPM to get the cost of equity for the project?
What is the pre-tax cost of debt?
What is the WACC?

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Expert Solution

jeff jeffy answered 1 year ago

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