Water Park, Inc., a midstate Texas recreation facility, is L = 27% debt financed. It pays corporate taxes at the rate of 35%. The firm’s (leveraged) beta is 1.45.T* = 0.21, rd = 12%, rf = 8%, and rM = 15%. Assume annual capital structure rebalancing.
a) What is Water Park’s required return to (leveraged) equity, re?
b) What is Water Park’s WACC?
c) What is Water Park’s unleveraged required return, ?
d) What unleveraged beta is implied by r?
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SOLUTION
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a) What is Water Park’s
required return to (leveraged) equity, re?
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r = rf + β(rM - rf)
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rf =
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8%
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β =
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1.45
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rM =
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15%
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r =
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18.15%
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