Hello, I am having difficulty with this calculation- can you please help or explain how to tackle
Question:
Hello, I am having difficulty with this calculation- can you please help or explain how to tackle it?
Calculate the weighted average cost of capital (WACC) of DuraBike using available information (estimate the cost of equity using capital asset pricing model - CAPM).
Case study:
As per the above forecasts and assume they remain the same every year, this 10-year campaign will be able to generate free cash flows of $2,585,600 per year (ignored the change in working capital). DuraBike currently has 80% equity and 20% debt in the balance sheet. Regarding the equity, DuraBike's shares have a beta coefficient of 1.4, while the risk-free rate is 2.5% and the expected return on market portfolio is 8.5%. On the liability side, DuraBike is paying an average before-tax interest rate of 8% per annum on its borrowings (the tax-rate in the U.S. is 30%).