I’m working on this practice question.
Allen Udell, an analyst, is estimating WACC for Sunrise Industries S.A., a company that is based in Europe and can borrow at 12-month Euribor. Udell has collected the following information about the company.
The current 12-month Euribor is 3.5%. The market risk premium is 4%, and unlevered beta is 0.8. The risk-free rate is 2.5%. The company’s tax rate is 35%.
The WACC for debt-to-capital ratio of 0.45 is closest to A. 4.5% B. 5.0% C. 5.5%
Am I solving this correctly? I first need to lever beta, correct?
BL = (1+(1-.35)*(.45/.55)) = 1.2255
Then E(Ri)=.025+1.2255*.04=.074
WACC=.45*.035*(1-.35)+.55*.074=.0509 so B. Is that the correct process?