SHOW ALL YOUR WORK IN EXCEL FILE DO NOT INPUT NUMBERS MANUALLY, USE FORMULAS Smaltz Enterprises is currently involved in its annual review of the firm s cost of capital Historically, the firm has relied on the CAPM to estimate its cost of equity capital The firm estimates that its equity beta is 1 25, and the yield to maturity on long term US Treasury bonds is 4 28 The firm s CFO is currently in a debate with one of the firm s advisers at its investment bank about the level of the market risk premium Historically, Smaltz has used 7 to approximate the market risk premium However, the investment banker argues that this premium has shrunk dramatically in recent years and is more likely to be in the 3 to 4 range Estimate Smaltz s cost of equity capital using a market risk premium of 3 5 Smaltz s capital structure is comprised of 75 equity (based on current market prices) and 25 debt on which the firm pays a yield of 5 125 before taxes at 25 What is the firm s WACC using both a 3 and 4 market risk premium Given Levered equity beta Treasure bond yield Market risk premium Tax rate Debt as of Capital Structure Solution Legend 1 25 4 28 3 50 25 00 25 00 Value given in problem Formula Calculation Analysis required 7 00 Qualitative analysis or Short answer required Goal Seek or Solver cell Crystal Ball Input Crystal Ball Output Solution a Cost of equity Low ERP High ERP b WACC with Low ERP Cap Str Weights Debt Equity After Tax Costs Product 25 00 75 00 WACC with High MRP Cap Str After Tax Weights Cost Product Debt Equity 25 00 75 00

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Question: SHOW ALL YOUR WORK IN EXCEL FILE. DO NOT INPUT NUMBERS MANUALLY, USE FORMULAS. Smaltz Enterprises is currently involved in its annual review of the

SHOW ALL YOUR WORK IN EXCEL FILE. DO NOT INPUT NUMBERS MANUALLY, USE FORMULAS.

Smaltz Enterprises is currently involved in its annual review of the firm?s cost of capital. Historically, the firm has relied on the CAPM to estimate its cost of equity capital. The firm estimates that its equity beta is 1.25, and the yield to maturity on long-term US Treasury bonds is 4.28%. The firm?s CFO is currently in a debate with one of the firm?s advisers at its investment bank about the level of the market risk premium. Historically, Smaltz has used 7% to approximate the market risk premium. However, the investment banker argues that this premium has shrunk dramatically in recent years and is more likely to be in the 3% to 4% range.

Estimate Smaltz?s cost of equity capital using a market risk premium of 3.5%.
Smaltz?s capital structure is comprised of 75% equity (based on current market prices) and 25% debt on which the firm pays a yield of 5.125% before taxes at 25%. What is the firm?s WACC using both a 3% and 4% market risk premium?

SHOW ALL YOUR WORK IN EXCEL FILE. DO NOT INPUT NUMBERS MANUALLY,

Given Levered equity beta Treasure bond yield Market risk premium Tax rate Debt as % of Capital Structure Solution Legend 1.25 4.28% 3.50% 25.00% 25.00% = Value given in problem = Formula/Calculation/Analysis required 7.00% = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution a. Cost of equity Low ERP High ERP b. WACC with Low ERP Cap Str Weights Debt Equity After-Tax Costs Product 25.00% 75.00% WACC with High MRP Cap Str After-Tax Weights Cost Product Debt Equity 25.00% 75.00%

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