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# Vandelay's weighted average cost of capital.

1. The following data pertains to Vandelay Industries and the financial markets in general:

§ Their equity beta is 1.2. § The expected return on the stock market is 10%.
§ Their equity has a market value 4 times as large as its book value. § Their long-term debt consists of 30-year bonds rated BB.
§ Their ratio of long-term debt to equity (based on book values) is 1.0. § They use short-term (one-year) debt equal to 50% of their long-term debt. The short-term debt is also rated BB.
§ The Treasury bond yield curve is flat at 4% for all maturities. § Their tax rate is 30%.

Corporate bond yield spreads (in basis points) over Treasuries:

BondRating Bond Maturity in Years
1 2 3 5 7 10 30
AAA 30 32 34 38 40 45 50
AA 34 36 38 42 47 55 60
A 40 44 48 50 58 65 74
BBB 63 65 68 75 85 90 100
BB 90 105 130 150 160 180 215

Estimate Vandelay's weighted average cost of capital. (Hint: you can assume that the book value of their equity is \$100M)

#### Solution Preview

See the attached file. Thanks

1. The following data pertains to Vandelay Industries and the financial markets in general:

§ Their equity beta is 1.2. § The expected return on the stock market is 10%.
§ Their equity has a market value 4 times as large as its book value. § Their long-term debt consists of 30-year bonds rated BB.
§ Their ratio of long-term debt to equity (based on book values) is 1.0. § They use short-term (one-year) debt equal to 50% of their long-term debt. ...

#### Solution Summary

Shows how to work out the WACC for Vandelay.

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