Problem #$1$ Everything WACC

Everything Corp. has operations in many different businesses, including the manufacturing of toasters. The goal in this problem is to find the WACC appropriate for discounting the cash flows associated with an expansion in Everything$$s toaster manufacturing business. Because Everything Corp. is in multiple lines of business, its overall cost of capital is not appropriate for this purpose. Instead, you will need to find the betas of some comparable firms in order to calculate the WACC. Enter formulas in the appropriate cells in order to complete the five steps outlined.

Step $1$: Unlever Beta. Equity $($levered$)$ betas for three comparable firms are given. Unlever each beta to get the asset beta for each comp. Debt ratios are given for the first two comps, the third can be found using the financial statements for Superior Toasters on the second tab. Average the asset betas to get an estimate of the appropriate asset beta for Everything$$s investment in toaster manufacturing. Hint: be careful when entering your formulas for levering and unlevering, making sure that you use the right ratios $($remember that D$/$V $+$ E$/$V $=1$ and that V $=$ D $+$ E$).$

Step $2$: Relever Beta. Now relever the asset beta according to the appropriate capital structure for Everything. Note that when available, the target debt ratio is more appropriate than the current debt ratio, because it is more representative of what Everything$$s capital structure will be over the long run. Here the target debt ratio is given.

Step $3$: Cost of Equity. Find the appropriate cost of equity $($using the relevered beta$)$ according to the CAPM.

Step $4$: Cost of Debt. For the cost of debt, we$$d like to use the yield to maturity on Everything$$s outstanding bonds. In this case, we don$$t know that information, so we need to estimate the cost of debt using data from comparable firms. This data is provided in the worksheet that says $$Bond data$.$ Estimate Everything$$s bond rating assuming that Everything has a debt ratio $($TD$/$TA$)$ of $18\%$ and a times$-$interest$-$earned ratio $($TIE$)$ of $7\mathrm{.}7.$ Observe the premium $($over $10-$year treasurys$)$ at which bonds of similar risk are trading, and use this premium to estimate Everything$$s cost of debt if it were to issue bonds to help finance this project.

Step $5$: WACC. We now have all the pieces available to put together the appropriate WACC for Everything$$s investment in toaster manufacturing.

Q$1$: Under the assumptions given, what is the appropriate WACC for Everything$$s investment in toaster manufacturing? $\_\_\_\_\_\_\_\_\_\_$

Q$2$: Suppose that Everything determined that the appropriate target debt ratio for their toaster division would really be $0\mathrm{.}4.$ What would be the WACC? $\_\_\_\_\_\_\_\_\_\_$