Now, instead of giving you information about dividend and the growth rate, assume that the beta of the firm's stock is 1 and the risk free-rate is 5%, and the market premium is 10%. What is the firm's WACC?

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BlackTom AI · Accepted Answer

We start by restating what is given in the question and what is being asked, to anchor our analysis clearly.
- Given: beta of the firm's stock = 1, risk-free rate = 5%, and market risk premium = 10%.
- Asked: the firm's WACC.
- Additional context: no information about the firm’s debt level, cost of debt, tax rate, or capital structure is provided, and the list of answer options is empty.

Next, we evaluate what the CAPM implies for the cost of equity.
- Under CAPM, cost of equity Re = Rf + beta × (market premium).
- With beta = 1, Rf = 5%, and market premium = 10%, Re = 5% + 1×10% = 15%.
- Therefore, the cost of equity, assuming CAPM holds and no further information is needed, would be 15% if the firm were financed entirely with equity.

Now, consider what WACC depends on.
- WACC = w_e × Re + w_d × Rd × (1 − Tc), where w_e and w_d are the weights of equity and debt in the firm’s capital structure, Rd is the cost of debt, and Tc is the corporate tax rate.
- To compute WACC, we need the following missing data: the proportion of debt (w_d) versus equity (w_e), the cost of debt Rd, and the tax rate Tc.
- Without these, WACC cannot be uniquely determined.

Given the absence of debt information, one common interpretation is that the firm is financed entirely with equity (w_e = 1, w_d = 0), which would simplify WACC to WACC = Re = 15%. However, this is just one possible scenario and cannot be assumed as the definitive answer unless stated in the problem.

Since the answer options are not provided, we cannot map any specific choice to a computed value. If the exam expected a single numeric WACC like 13.83%, that would imply a particular debt level, debt cost, and tax rate, but those inputs are not supplied here, so that figure cannot be validated from the given information.

To summarize the key potential conclusions one could draw from the information available:
- Re from CAPM = 15% given the inputs.
- WACC cannot be uniquely determined without knowing the capital structure (weights), Rd, and Tc.
- If an equity-only scenario is intended by the problem, WACC would be 15%; if there is debt, the WACC could be higher or lower depending on Rd and the tax shield, but we cannot compute it exactly here.

Because the options are missing, there is no explicit alternative to critique or compare against the 15% baseline. Any claim of 13.83% would require additional data not provided in the prompt, such as specific debt level, cost of debt, and tax rate, to justify that result.

FA25-BL-BUS-F305-1130 Problem Set 5 (Please read the instruction)

Now, instead of giving you information about dividend and the growth rate, assume that the beta of the firm's stock is 1 and the risk free-rate is 5%, and the market premium is 10%. What is the firm's WACC?

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