The Casterly Rock Company (CRC) has a beta of 0

Finance Jan 04, 2021

The Casterly Rock Company (CRC) has a beta of 0.9. The market rate of retum is 14% and the risk-free rate is 4%. CRC's debt/equity ratio is 0.5 and the average annual interest rate the company pays on its debt is 6%. The corporation tax rate applicable is 25%. a. What is CRC's cost of equity? b. What is the WACC?

Expert Solution

Cost of Equity = Rf + Beta*(Rm-Rf)

= 4%+ 0.9*(14%-4%)

= 4% + 9%

= 13%

b. debt weight = 0.5/1.5 = 0.33

Equity Weight = 1-0.33 = 0.67

After Tax cost of debt = Interest Rate*(1-tax rate)

= 6%*(1-25%)

= 4.5%

WACC = (cost of Debt*Weight of Debt)+(Cost of Equity*weight of Equity)

=(4.5%*0.33)+(13%*0.67)

= 10.17%

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