Toronto Skaters Company is an all-equity company and is able to fund a $1 million investment using cash.The company has a beta of 1.4, the risk-free rate is3%, and the return on the market is 8%.Flotation costs for new equity are 2%.The tax rate is 40%.What is the WACC of the investment?

Question

Quizplus · Accepted Answer

The Weighted Average Cost of Capital (WACC) for an all-equity firm is calculated using the Capital Asset Pricing Model (CAPM) formula: WACC = Rf + β(Rm - Rf), where Rf is the risk-free rate, β is the beta of the company, and Rm is the return on the market. Given that the company is all-equity and is using cash for the investment, flotation costs and the tax rate are irrelevant to the calculation. Therefore, WACC = 3% + 1.4(8% - 3%) = 3% + 1.4(5%) = 3% + 7% = 10%.

Toronto Skaters Company Is an All-Equity Company and Is Able