What was the risk premium of micro-cap stocks

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Reference no: EM132042604

Question: Please determine the Weighted Average Cost of Capital (WACC) for a firm. A firm wants to raise capital in the near future. As part of their work to prepare for potential investors, they determined that they need the WACC of the firm. The firm is currently structured as 70% equity and 30% debt.

1. Since the company size is comparable with publicly traded micro-cap companies, a analysis was made of the Wilshire Micro-Cap ETF, which represents a basket of micro-cap US companies. The current price of this EFT is $29.97. At inception 6.25 years ago, it traded at $15.45. In a comparable period, the 3-month T-Bills, which are considered risk free, returned 0.35% annualy.

What was the annualized return for the reference micro-cap ETF?

During the same period, what was the risk premium of micro-cap stocks?

Historically the company produced equity returns that indicate a beta to the general micro-cap market of around 1.25. Assuming this number will remain stable, what should the cost of equity be?

2. Your only debt outstanding in the market is a single bond with the following parameters: 10yrs until maturity, semiannual coupons with an (annual) coupon rate of 7% and current market price of 95 (as a percentage of the notional amount). What is your cost of debt?

3. Given the results from 1 and 2, what is your firm's WACC?

Reference no: EM132042604

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