Question

Using the table below, explain why the WACC for EBS differs from its competitors.

Capital Structure Components WACC Cost of Capital Components Expected Return of Risk Free Pre-Tax Market Rate Tax Rate Debt Cost Beta Bond Rating Short- Long- Equity Term Debt Term Debt Total Capital Target EBS 0.90 0.88 10.76% 9.64% 2.72% 2.41% 21.06% 21.83% 3.20% 2.80% B+ B- 160,950 197,744.43 3,489 19,158 17,176 37,803 181,615 254,705 9.11% 7.30% Parks and Resorts Six Flags Cedar Fair 0.89 0.77 9.6% 9.6% 2.4% 2.4% 24.2% 17.0% 4.2% 4.8% B+ B+ 4,190 2,699 192,467 8 2,150 6,676 4.857 6.72% 6.20% I Studio Entertainment Lions Gate 1.219.6% 2.4% 0.0% 4.3% B- 2,666 439 2,8385,943 7.39% Broadcasting and Media Viacom Netflix 1.1 1.46 9.6% 9.6% 2.4% 2.4% 22.0% 17.7% 4.5% 2.6% BBB- BB- 12,059 160,826 160,826 320 138 8,638 13,541 21,017 174,505 7.45% 12.11% Consumer Products ULTA Sally Beauty Game Stop 0.86 0.81 0.92 9.6% 9.6% 9.6% 2.4% 2.4% 2.4% 22.7% 25.7% 23.5% 2.5% 6.9% 5.9% BB BB- 20,034 1,603 918 211 21 250 1,654 1,560 1,022 21,899 3,184 2,190 8.06% 6.70% 6.42%

Answer 1

I have answered the question below.

Please upvote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

We know the formula for Cost of equity as = Risk free rate of return + Beta * ( market rate of return - risk free rate of return)

We know the formula for Cost of debt = pre tax debt cost - tax rate

and WACC = E/V *cost of equity + D/V * after tax cost of debt

Where E is market value of firm's equity and D is market value of firm's debt

In this case, total debt = short term debt + long term debt

E is the column corresponding to Equity

V is Total Capital which is equal to E + D

Cost of equity, cost of debt, E, D, V and the tax rate are the driving factors of difference in WACC for EBS as compared to competitors as each of the competitor has a unique way of rising capital.

E.g: EBS rised a lot of capital through equity than its competitors which rises the WACC (9.11%) because rising through equity is costlier for WACC than rising through debt