HD Inc. has been in the auto industry for a long time. The WACC of the firm is 1

Question

HD Inc. has been in the auto industry for a long time. The WACC of the firm is 15%. The D/E ratio is .5. The YTM of the debt is 3%. Tax rate is 35%. Recently, the firm is planning to enter the local personal lending market in City N. There are three personal lending firms in City N already. They are the followings.

Both A and B are in personal lending only, while C has a division in retail business. What is the expected WACC of the personal lending project of HD Inc.? Firm WACC D/E Cost of Debt Total Lending Tax Rate A 10% 0.8 3% $1.2M 30% B 11% 1.0 3% $1.8M 30% C 7% 0.5 3% $1M 35%

FIRM WACC D/E Cost of Debt Total Lending Tax Rate A 10% 0.8 3% 1.2 M 30% B 11% 1.0 3% 1.8 M 30% C 7% 0.5 3% 1 M 35%

Explanation / Answer

From the information provided, HD Inc. portfolio is exactly matching with Firm C. So once HD Inc enters city N, it WACC should be equal to WACC of C which is 7%

Also from the given information of HD Inc, we can find cost of equity as follows

15% = 0.5 * 3% * (1-35%) + 0.5 * Cost of Equity

After Solving, we get Cost of Equity as 28.05%

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.