Calculate Optimus' required rate of return on equity using the capital asset pricing model (CAPM). For the CAPM, use the following assumptions:

• Use a risk-free rate of 4.0%.
• Use 6.0% as the market risk premium.
• For the beta, use the beta 0.80.

Calculate the WACC for Optimus. As a reminder, Optimus is funded with 40% debt and 60% common stock; there is no preferred stock in the capital structure. The debt has an after-tax cost of 4%.

Use the Optimus required rate of return on equity that you calculated using the CAPM.

• Explain why it is appropriate for Optimus to value the Electrobicycle project using its WACC. Compare using the WACC to using solely the cost of equity in valuing the Electrobicycle project.

Answer rating: 100% (QA)

Calculating Optimus WACC and Valuation Approach 1 Required Rate of Return on Equity CAPM Riskfree ra... View the full answer