A firm has a market value of $10 million, $1 million of which is debt. The equity beta is 0.9, and the firm's debt is considered to be risk-free. The firm pays taxes at the marginal rate of
40%. The equity risk premium is 4%, and the relevant risk-free rate is 6%. Calculate the firm's
WACC.

Question

Quizplus · Accepted Answer

WACC = (Equity / Total Value) * Equity Beta * Equity Risk Premium + (Debt / Total Value) * Risk-Free Rate * (1-Tax Rate)

Total Value = Market Value of Equity + Debt = $10 million
Equity = Market Value of Equity = $10 million - $1 million = $9 million
Debt = $1 million
Equity Beta = 0.9
Equity Risk Premium = 4%
Risk-Free Rate = 6%
Tax Rate = 40%

WACC = (9/10) * 0.9 * 4% + (1/10) * 6% * (1-40%) = 9.0%

A Firm Has a Market Value of $10 Million, $1