The Oval Bearing Corp.manufactures ball bearings.Oval Bearing Corp.is all equity financed and its shareholders require a return of 8%.Elliptical Bearing Inc.is also a manufacturer of ball bearings.Elliptical has 30% debt in its capital structure (debt-to-equity is 0.4286),and its cost of debt is 4%.What is Elliptical's WACC? Assume that the tax rate is 0%.

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Quizplus · Accepted Answer

Calculate the levered cost of equity from M&M Proposition II: k_E = k_U + (k_U - k_D) 11ea7fdb_fc63_1acc_a768_4b9de7421654_TB2902_11 k_E = 0.08 + (0.08 - 0.04) × 0.4286 = 0.0971 Now calculate the WACC. k_w = w_Ek_E + w_Dk_D k_w = (0.70 × 0.0971) + (0.30 × 0.04) = 8%