• You are a business analyst tasked with determining the WACC (weighted average cost of capital)...

The covariance between stock return and market returns as well as variance of market returns is calculated as

Mean of stock return = (0.08+0.02)/2=.0.05

Mean of market return = (0.10+0.0088)/2=.0.0544

So Covariance between returns of stock and market =

{(0.08-0.05)*(0.1-0.0544) + (0.02-0.05)*(0.0088-0.0544)}/(2-1) = 0.002736

Variance of market returns = {(0.1-0.0544)^2+ (0.0088-0.0544)^2}/(2-1) =0.004159

So, Beta of stock = Covariance between stock and market returns/ variance of market returns

=0.002736/0.004159= 0.66

From CAPM model

Cost of equity = Rf + beta* (Rm - Rf) = 0.016 + 0.66*(0.13-0.016)

= 0.091 or 9.1%

So, WACC = E/V *Cost of Equity + D/V * Cost of debt * (1-tax rate)

=0.4*0.091 + 0.6* 0.054*(1-0.11)

= 0.065236 = 6.5236%

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