The question is asking to calculate WACC of the operating asset inclusive of pension plan assets, but the formula represents the cost of equity
Cost of equity = Risk Free Rate+ Beta(Risk Premium).
Appreciate the feedback.作者: mp3bu 时间: 2013-4-2 13:24
debt (liabilities) have a beta of 0.
they are asking to recognize that inclusion of pension assets changes around the beta (risk) of the firm.
and as a result the WACC would change. If the debt had a weightage – then that would have changed the WACC - but nevertheless - it would increase because the pension assets were also included.作者: transferpricing 时间: 2013-4-2 13:25
CP
Appreciate the feedback..I understand all the issues that you brought up.
I have assumed that liabilities represent debt.. perhaps the problem does not assume the same and therefore Weight of Debt is zero making the WACC equal to the cost of equity作者: Windjam 时间: 2013-4-2 13:25
just realized – WACC would reduce. (not increase).
Original Beta of OA = 9.4 * 1.2 / 17 = 0.6635
with that WACC as calculated would have been: 3 + 0.6635 * 6 = 6.98%
now with the pension assets thrown in:
beta of OA = (9.4 * 1.2 - 14 * 0.7)/17 = 0.087
WACC = 3.52%
