The figures are from Conrail (B) (Harvard Business School's case study)
How to Calculate Conrail’s WACC (@industrial average debt ratio =>49%)
1. Calculate Ke from Conrail’s beta (1.30) given in exhibit 10
Ke= Rf + Beta*(Market risk Premium)
= 6.54% + 1.3 * 7% => 15.64% (Ke @ Conrail’s current debt ratio (21%)
2. Assume Kd = 8.11% unchanged (equal to Yield on Long term corporate bond of Baa)
3. Calculate opportunity cost (K, or unlevered return) from below fomula
K = Kd (D/Tc) + Ke(E/Tc) Where Tc = D+E
K = 8.11% * 21% + 15.64* 79% => 14.058%
4. Relever back @ new debt ratio to find new Ke @ target debt ratio
Ke (new) *E/Tc = K – Kd*(D/Tc)
Ke*51% = 14.058% - 8.11%*(49%)
Ke (new) = 19.77%
(This is Ke @ target debt ratio = 49%)
5. Calculate new WACC @Target debt ratio (49%)
WACC = Kd(1-T)*D/Tc + Ke*E/Tc
= 8.11%*(1-0.35)*49% + 19.77%*51%
=12.667%
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