Mark, a consultant for ZZZ Inc., has been hired to calculate the WACC for YYY, an App development firm. YYY's shares are trading at $22 and the firm has 1 billion shares outstanding.

Based on their balance sheet, YYY has long-term debt of $10 billion (the underlying bonds have 9 years until maturity, a face value of $1,000, and annual coupon of 8%, and trade at 90% of par).

The book value of equity is $16.2 billion.

The firm's tax rate is 25%.

Mark estimates that YYY's beta is 0.15.

As per the Wall Street Journal the currently accepted risk free rate is 2% and the market risk premium is 9.5%.

Mark calculates the cost of equity for YYY using CAPM as:

E(R) = 2% + 0.15 (9.5%-2%) = 3.125%. The after-tax WACC is: WACC = (10/26.2)(8%) + (16.2/26.2) (3.125%)(1-0.25) = 4.69%.

i. Identify any concerns with the analysis along with the values you would use instead?

ii. In general, explain when and why is it appropriate to use the firm's WACC for project evaluation?

Answer rating: 100% (QA)

i Concerns with the analysis and alternative values a Concerns 1 Beta A beta of 015 seems very low for a company in the technology sector which tends ... View the full answer