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Calculations for the WACC of a Company

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1. You need to estimate the equity beta for Golden Clothiers, Inc. Golden's debt-to-equity ratio is 85%, which is higher than a typical firm in its industry. The following table shows the levered equity betas and debt-to-equity ratios for three comparable chemical firms.

Assume the tax rate is 40%.

(See attached file for data)

a. Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.
b. What is your estimate of Golden Clothiers' levered equity beta?
c. If T-Bills are yielding 1.8% and the return on the market is 9.3%, what is the required return on Golden Clothiers' stock, according to the CAPM?
d. Golden has 5-year maturity bonds outstanding with a par value of $1,000 that pay annual coupons of 5%. These bonds are currently selling for $982. What is Golden's required return on debt?
e. If Golden has no preferred stock outstanding, their debt-to-equity ratio of 85% is expected to remain constant going forward, and their marginal tax rate is 40%, what is their weighted average cost of capital?

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Solution Summary

The solution is provided in excel with cellular references (this means that if you change the value in any cell, excel would automatically do the calculations for you). The solution shows calculations of beta, cost of equity, cost of debt for Golden Clothiers, Inc

See Also This Related BrainMass Solution

DLR Company: APV or WACC to calculate market value of equity

See attached files.

DLR Company has just announced its results for the end of fiscal year. The following information is from its financial statements (all numbers in $ 000):

Income Statement
Sales 20,000.00
Cost of goods sold (14,000.00)
Gross profi t 6,000.00
SG&A Expenses (2,000.00)
Depreciation (1,600.00)
Operating income 2,400.00
Interest expense (400.00)
Earnings before tax 2,000.00
Taxes (700.00)
Net income 1,300

Balance Sheet
Current Assets 4,000 Interest bearing debt 5,000
Fixed Assets 8,000 Shareholders Equity 7,000
Total Assets 12,000 Total Liability & Equity 12,000

DLR's business is stable (its expected future growth rate is zero), its capital expenditures are currently equal to the depreciation and this situation will continue in the future. The net working capital needs will also remain unchanged. The company pays 35% tax, its cost of debt is 8% and the company plans to keep the same amount of debt indefinitely. If DLR didn't have debt, its cost of equity would have been 12%. The current interest rate on government T-bonds is 3.5% and the market risk premium is 7.5%.

a. Given the information available, what approach (APV or WACC) is better to use to calculate the market value of equity? Why?
b. What is the market value of company's equity?
c. What is the value of interest tax shield?
d. What is the company's WACC?
e. What are the company's levered cost of equity and beta?

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