Reading 22 Page 487, Question 3 represents, question, asking, assets

SpyAli

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.

mp3bu

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.

transferpricing

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

Windjam

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%