Amgel Manufacturing Company's current capital structure is comprised of 30% debt and 70% equity (based on market values). Amgel's equity beta (based on its current level of debt financing) is 1.20, and its debt beta is 0.29. Also, the risk-free rate of interest is currently 4.5% on long-term government bonds. Amgel's investment banker advised the firm that, according to its estimates, the market risk premium is 5.25%.
a. What is your estimate of the cost of equity capital of Amgel (based on the CAPM)?
b. If Amgel's marginal tax rate is 35%, what is the firm's overall weighted average cost of capital (WACC)?
c. Amgel is considering a major expansion of its current business operations. The firm's investment banker estimates that Amgel will be able to borrow up to 40% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for this project.
Please use the attached spreadsheet. Thank you!
The solution explains how to calculate the cost of equity and WACC