I understand how to solve for WACC if there is only one company involved, but how do I solve for WACC when there are two companies involved? Question is shown below. Thanks in advance!

Q)

Utilitarian Co. is looking to expand its appliances division. It currently has a beta of 0.9, a D/E ratio of 2.5, a marginal tax rate of 30%, and its debt is currently yielding 7%. JF Black, Inc. is a publicly traded appliance firm with a beta of 0.7, a D/E ratio of 3, a marginal tax rate of 40%, and its debt is currently yielding 6.8%. The risk-free rate is currently 5% and the expected return on the market portfolio is 9%. Using this data, calculate Utilitarian’s weighted average cost of capital for this potential expansion.

Not that hard to memorize. Just hink of it as the Dupont formula for beta (Note: the Equity mulitplier is Assets/equity or 1+D/E). Rememebr that ROE is the “Levered” version of ROA.

With ROE and ROA:

ROE = ROA x Equity Multiplier ==>

ROE = ROA x (1 + D/E)

vs. With Levered and Unlevered Beta:

Levered beta = Unlevered beta x [1+D/E(1-t)]

Since we’re talking about debt, there should be a tax adjustment. Hence the D/E is multiplied by “1-t”