Given the following (using the 10 year treasury yield (5.697%) as the risk free rate), again provided in the case study, rS = 12.70%
(chart)
Finally, VL is determined as follows:
(chart)
In this case, one must derive rO. To do so, the first step is to determine the unleveraged beta, or BU. Mr. Mizuno has provided the formula below to "lever" and "unlever" betas. Additionally, the values for MCI's existing leveraged equity, debt market value, equity market value, and corporate tax rate are provided:
(chart)
With this data, one first determines that BU = .90. This figure is then applied to the CAPM to determine the rO, which is 12%. With the last variable, EBIT, given in the case study as $1,118M, VL is determined to be $6,968M.
Gathering all of the above data and returning to the first formula above, MCI's current WACC is .362. Now what happens to WACC in a hypothetical debt financed repurchase of equity? To find out, a couple of additional assumptions are made: