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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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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

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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