43.14
14.Company A is 60% equity and 40% debt. The beta of its equity
is 1.3 and the beta of its debt is 0. The expected return on the
market is 12% and the risk free rate is 3%.
a. What is the beta of its assets? (3)
The risk of the total portfolio of claims on the assets must be equal to the risk of those assets. Beta Assets = 1.3(.6)+(0)(.4)=0.78
b. What is its WACC? (3)
WACC equals expected return on assets. You can calculate this using the CAPM and the beta of the assets. E[Ra}=.03+0.78(.12-.03)=.10
c.What types of projects would you use the WACC for? (3)
Scale expanding projects