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11 September, 21:52

Nodebt Inc. is a firm with all-equity financing. Its equity beta is. 80. The Treasury bill rate is 4%, and the market risk premium is expected to be 10%. (LO13-1) a. What is Nodebt's asset beta? b. What is Nodebt's WACC?

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  1. 11 September, 22:15
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    Asset beta 0.8

    WACC 12%

    Explanation:

    a.

    Asset Beta = [ Equity Beta / (1 + (1 + t) x D/E) ]

    As Firm is with all equity finance there is no debt

    Beta Asset = [ 0.8 / (1 + (1 + t) x 0/100) ]

    Beta Asset = [ 0.8 / (1 + 0) ]

    Beta Asset = 0.8 / 1

    Beta Asset = 0.8

    b.

    To calculate WACC we need Required rate of return, we can calculate it using CAPM

    Required rate of return = Risk free rate + Beta (risk premium)

    Required rate of return = 4% + 0.8 (10%)

    Required rate of return = 4% + 8%

    Required rate of return = 12%

    WACC is same as the required rate of return as there is no debt financing and the weightage of equity is 100%.

    WACC = 12%
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