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SBM has a capital structure consisting of 20% debt and 80% equity. The firm's debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM - rRF) is 6%. Using the CAPM, SBM estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate.
a. What is SBM's current WACC?
b. What is the current beta on SBM common stock?
c. What would SBM's beta be if the company had no debt in its capital structure? (That is, what is Bloom's unlevered beta, bU?)
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