Page 115 - AFM Integrated Workbook STUDENT S18-J19

The weighted average cost of capital (WACC)

Publishing industry

The asset beta of publishing operations can be found from the industry
information as follows: (assuming the debt beta is zero)

V E 2
ß = ß =1.20 0.86
a
e
V + V [1 – T] 2 + 1[1 – 0.20]
E
D
Scafell Co asset beta
Hence, the asset beta of Scafell will be a weighted average of these two asset
betas:

ß a (Scafell) = (0.60 × 1.00) + (0.40 × 0.86) = 0.94

Scafell Co equity beta

Regearing this asset beta now gives:

0.94 = ß e × [3/(3 + 1(1 – 0.20))]

So, ß e = 0.94/0.79 = 1.19

Scafell Co cost of equity

Using CAPM:

k e = R F + ß (E(R M) – R F) = 5% + (1.19 × 6.5%) = 12.7%

Illustrations and further practice

Now try TYU 1 from Chapter 6

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