Calculate the cost of equity capital using the CAPM

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Reference no: EM131066512

You work for HydroTech, a large manufacturer of high-pressure industrial water pumps. The firm specializes in natural disaster services, ranging from pumps that draw water from lakes, ponds, and streams in drought-stricken areas to pumps that remove high water volumes in flooded areas. You report directly to the CFO. Your boss has asked you to calclulate the WACC in preparation for an executive retreat. Too bad you're not invited, as water pumps and skiing are on the agenda. At least you have an analyst on hand to gather the following required information: 1) The risk-free rate of interest, in this case, the yield of the ten-year government bond is 3%. 2) Hydrotechs: a) Market capitalization (its market value of equity) is $100 million. b) CAPM beta, 1.2. c) Total book value of debt outstanding is $50 million. d) Cash is $10 million. 3) The cost of debt (using the quoted yields on HydroTech's outstanding bond issues) is 5%. With this information in hand, answer the following: 1) Calculate HydroTech's net debt. 2) Compute HT's equity and (net) debt weights based on the market value of equity and the book value of net debt. 3) Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%. 4) Using a tax rate of 35%, calculate HT's effective cost of debt capital. 5) Calculate HT's WACC. 6) When is it appropriate to use this WACC to evaluate a new project?

Reference no: EM131066512

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