You have a new start-up firm. You think that the value of your start-up is around $60 million, but you will need to do a serious NPV analysis before you know the precise value. You are planning to have a 50% debt-to-value ratio, and that you will continuously rebalance to maintain this leverage. You have information on two other companies. The names of these companies are “Comp A” and “Comp B”. Comp A has the same business risk as your start-up but different financial leverage. Comp A is continuously rebalancing its leverage to maintain a 30% debt-to-value ratio. Comp A’s equity beta is 1.5 and the debt beta is 0.5. 

CompA’s most recent annual sales figure was $3 million. Comp A’s total market value (debt + equity) is $10 million. Comp B has the same leverage as your start-up (50% debt-to-value ratio) and operates in a different line of business than your start-up. 

Comp B is also continuously rebalancing its leverage. Comp B’s equity beta is 2 and the debt beta is 0.7. CompB’s most recent annual sales figure was $8 million. Comp B’s total market value (debt + equity) is $60 million. The market risk premium is 10% and the risk free rate is 3%. 

The tax rate is 30%. Your cost of debt (expected return on debt) will be 4%. 

What is your best estimate for the equity beta of your start-up? 

What is the WACC for your start-up?

Answer rating: 100% (QA)

The market risk premium 10 The risk free rate 3 The tax rate 30 Cost of debt 4 Comp A Debttovalue ra... View the full answer