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Manal Elkhoshkhany
Manal Elkhoshkhany, Tutor
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How to calculate the Asset Beta and WACC Equity Bet ...

Customer Question

How to calculate the Asset Beta and WACC?
Equity Bet = .80
Treasury Bill Rate = 4%
Market Risk Premium = 10%
Exempt from Taxes.

Any clue how to get the Asset Beta and the WACC???
Submitted: 6 years ago.
Category: Homework
Expert:  Manal Elkhoshkhany replied 6 years ago.

Hello Sgklein and welcome to Just Answer

I just need to review the formula that is in your book. Kindly advise the name of the book you are using: Title, author's name, and edition

Regards,

Customer: replied 6 years ago.
There is no textbook involved. This is the only information given on a homework problem.

Thanks.
Expert:  Manal Elkhoshkhany replied 6 years ago.

Hello again

The thing is that you are already given the beta, that is why I am confused. Can you post the question exactly as it was given to you please, maybe I am missing something.

Regards,

Customer: replied 6 years ago.
7.     ABC Corp. is a firm with all-equity financing. Its equity beta is .80. The Treasury bill rate is 4 per cent and the market risk premium is expected to be 10 per cent. What is ABC’s asset beta? What is its weighted average cost of capital? The firm is exempt from paying taxes.
Expert:  Manal Elkhoshkhany replied 6 years ago.
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Manal Elkhoshkhany, Tutor
Category: Homework
Satisfied Customers: 9483
Experience: More than 5000 online tutoring sessions.
Manal Elkhoshkhany and 4 other Homework Specialists are ready to help you
Customer: replied 6 years ago.
Can you show more detail for the asset beta?

Thank you.
Expert:  Manal Elkhoshkhany replied 6 years ago.

Hello

I have provided you with the formulae, I am confused, don't know what you mean by "More detail". Please clarify.

Anyway, here is a plain text answer, hope this clarifies it

Beta of an asset = (weight of debt x Beta of Debt) + (weight of equity x Beta of equity)

Since this is an all equity firm, the weight of equity = 1 or (100%)

Beta of ABC's asset = 1 x 0.8 = 0.8

Using CAPM:

Cost of equity = Risk Free Rate + Beta (Market Premium)

= 4 + (0.8 x 10)

= 12%

Since ABC is an All Equity firm, WACC = Cost of Equity = 12%

Customer: replied 6 years ago.
I guess my question is: Is there no debt to calculate the weight and beta of debt? So it would actually be:
Beta of asset = (0x0) + (1x.08)?

I just want to understand the answer. Thank you.
Expert:  Manal Elkhoshkhany replied 6 years ago.

Oh Smile

Yes, that is why i wrote "Since this is an all equity firm, the weight of equity = 1 or (100%)", becasue when the firm is an all-equity firm, this means it has no debt in its capital structure. When there is no debt in the capital structure, then the weight of debt = 0, so:

Beta of asset = (0x0) + (1x 0.8) = 0.8

I did not get what you meant by "more detail for the asset beta", but I get you now

Thanks a million for the bonus

Customer: replied 6 years ago.
Great! Thank you for your time and expertise!
Expert:  Manal Elkhoshkhany replied 6 years ago.
SmileThank you for using Just Answer

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