Hi, I would like help calculating the Weighted Average Cost of Capital (WACC) in the Midland Energy Resources Case. I need to calculate the WACC under the existing capital structure. I have used the following parameters from the case:

Beta = 1.25 (taken from comparable companies)

Cost of Debt (r_d)

R_d = 30 year YTM + Spread to treasury

R_d = 4.98 % + 1.62% = 6.60%

Cost of Equity (r_e) for Midland corporation

r_e = r_f + b_EMRP

r_e = 4.98% + (1.25*5%)

r_e = 5.09%

E/(D+E)

Debt ratio/(1- Debt ratio), where the debt ratio is equal to the consolidated D/E of 42.2%

= 42.2/ (1-42.2)

= 57.8%

D/(D+E)

= 42.2% (taken from table 1)

Tax rate

-tax rate, as this is not explicitly stated the tax rate for 2004, 2005, 2006 was calculated from Exhibit 1 and an averaged calculated (taxes/Income before taxes). This resulted in an average tax rate of 39.73%

Using the above inputs, and the WACC equation it equals 4.615%.

I would like someone to check that this is the correct answer for the WACC for the EXISTING capital structure.

Thank you.