Question #102
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 47
Status: Unattempted
Part of Context Group: Q101-102
Shared Context
Question
The beta for HTC is 1.056, the risk-free rate is 5.0% and the market risk premium is 10.0%. The weighted average cost of capital for HTC is closest to:
Answer Choices:
A. 13.34%
B. 15.56%
Explanation
Cost of equity = rf + (rm - rf) = 0.05 + 1.056(0.10) = 0.05 + 0.1056 = 0.1556
The best approximation for cost of debt is the interest expense divided by the market
value of the debt.
Cost of debt = Interest expense/market value of debt = $400 million/$4.0 billion = 0.10
WACC = wd × rd × (1 – t) + we × re = 0.40 × 0.10 × (1 – 0.40) + 0.60 × 0.1556 = 0.1174