Estimate the cost of unlevered equity

Reference no: EM133269820

Question - As the CFO of ADA Inc., you are estimating the firm's cost of capital. ADA's stock is trading at $24 per share and there are 20,000 shares outstanding. According to Hayoo Finance, the equity beta of ADA is 1.16. ADA has two bond issues outstanding. The first one has $180,000 par value, 6.5% coupon rate, 12 years to maturity, and is trading at 98 (98% of par). The second one has $124,000 par value, 8.5% coupon rate, 16 years to maturity, and is trading at YTM of 7.2%. All bonds pay semi-annual coupons. The tax rate is 25%. The market risk premium is 8% and the risk-free rate is 3%.

a) What is the WACC?

b) Estimate the cost of unlevered equity?

c) Assume that you quit and join one of ADA's competitors, BNB Inc. BNB firm is identical to ADA except its debt-to-equity ratio is 0.4 and tax rate is 30%. What is BNB's WACC?

Reference no: EM133269820

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