You have been asked to determine a WACC for DressHouse, a mid sized regional women's clothing...

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Finance

You have been asked to determine a WACC for DressHouse, a midsized regional women's clothing chain.
DressHouse has a debt-to-equity ratio is lower than usual at40%. The tax rate is 30%. Your assistant has provided you with thefollowing information on comparable firms.
Firm Levered Beta D/E Ratio
DressBarn 1.87 1.3
J. Jill 1.65 1.1
ChicWomen 1.35 0.7
So your next task is to determine the unlevered beta of each ofthese firms.
Using an average of those unlevered betas estimate a leveredequity beta for DressHouse.
Given T-Bills are currently yielding 0.9% and the return onmarket is 7.2%, calculate the required return DressHouse's stock,according to the CAPM.
DressHouse, currently, has outstanding 10-year maturity bondswith a par value of $1,000 that pay a 6% annual coupon, that areselling for $1,015. Calculate DressHouse's required return ondebt.
Based on your results above, calculate the weighted average costof capital for DressHouse.

Answer & Explanation Solved by verified expert

4.4 Ratings (861 Votes)

Levered BetaDE RatioTax Rate t 301tDE1tDE11tDELevered Beta11tDEUnlevered Beta1871310313091191187191098165110711077177165177093135070707049149135149091Average of Unlevered Beta 0980930913 2823 094Thus Unlevered Beta for Dress House using See Answer

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Transcribed Image Text

You have been asked to determine a WACC for DressHouse, a midsized regional women's clothing chain.DressHouse has a debt-to-equity ratio is lower than usual at40%. The tax rate is 30%. Your assistant has provided you with thefollowing information on comparable firms.FirmLevered BetaD/E RatioDressBarn1.871.3J. Jill1.651.1ChicWomen1.350.7So your next task is to determine the unlevered beta of each ofthese firms.Using an average of those unlevered betas estimate a leveredequity beta for DressHouse.Given T-Bills are currently yielding 0.9% and the return onmarket is 7.2%, calculate the required return DressHouse's stock,according to the CAPM.DressHouse, currently, has outstanding 10-year maturity bondswith a par value of $1,000 that pay a 6% annual coupon, that areselling for $1,015. Calculate DressHouse's required return ondebt.Based on your results above, calculate the weighted average costof capital for DressHouse.

Firm	Levered Beta	D/E Ratio
DressBarn	1.87	1.3
J. Jill	1.65	1.1
ChicWomen	1.35	0.7