Warm up Problems for Topic 9 (Leverage)
**These questions are designed to represent elementary principles, and are NOT representative of problems
that you will find on any exams.
1. What is the WACC of a company which is 25% debt financed has a return on equity of 18% and a return on debt
that is 8%?
WACC=r
E
(E/V)+r
D
(D/V)
WACC=(.18)(.75)+(.08)(.25)
WACC=15.5%
2. If a company has an asset beta of 1.4 and a return on assets of 14%, what is the market risk premium if the risk
free rate is 6%?
E(r
A
)=r
f
+
β
A
(E[r
M
]r
f
)
.14=.06+1.4(E[r
M
]r
f
)
(E[r
M
]r
f
)=5.7%
3. If the same company from question 2 is 80% equity financed and has a debt beta of 0, what is the equity beta?
β
E
=
β
A
+(
β
A

β
D
)(D/E)
β
E
=1.4+(1.40)(.2/.8)
β
E
=1.75
4. If a company has a return on debt of 7%, a return on equity of 12% and an asset return of 10%, what percent of
the company is equity financed?
WACC=r
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