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ElenaW [278]
3 years ago
5

Assume Apple shares have a market capitalization of $50 billion. The company just paid a dividend of $0.25 per share and each sh

are trades for $12. The growth rate in dividends is expected to be 4% per year. Also, Apple has $20 billion of debt that trades with a yield to maturity of 6%. If the firm's tax rate is 40%, compute the WACC
Business
1 answer:
Elina [12.6K]3 years ago
4 0

Answer:

WACC = 5.43%

Explanation:

First we need to determine the number of common shares of the company. The number of common stock shares outstanding can be calculated by dividing the market capitalization value by the current price per share.

Number of common shares outstanding = 50,000,000,000 / 12

Number of common shares outstanding = 4,166,666,667 or 4.166666667 billion shares

Now we need to determine the cost of common equity. It can be calculated using the fair price formula of constant growth model of dividend discount model. The formula for price today under this model is,

P0 = D0 * (1+g)  /  (r - g)

Where,

  • D0 * (1+g) is dividend expected for next period
  • r is the cost of equity
  • g is the growth rate in dividends

Plugging in the available values for each component, we can calculate the cost of common equity to be,

12 = 0.25 * (1+0.04)  /  (r - 0.04)

12 * (r - 0.04) = 0.26

12r - 0.48 = 0.26

12r = 0.26 + 0.48

r = 0.74 / 12

r = 0.06167 or 6.167%

Now we will plug in the values in the WACC formula.

Total value of debt and common equity = 20 bn + 50 bn  =  70 bn

WACC = 20/70 * 0.06 * (1-0.4)   +  50/70 * 0.06167

WACC = 0.0543 or 5.43%

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Explanation:

To maximize profit the marginal price of each cake must equal the marginal cost of each cake. The marginal cost is 300 and the marginal price is 5000/20 = 250. The marginal price of each cake (250) is less than the marginal cost of each cake (300), so Laura needs to make more than 20 cakes to increase her revenue and maximize her profit.

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B) both curves would shift to the right.

Explanation:

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New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $500,
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Answer:

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Explanation:

given data

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solution

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income if formed as corporation = earn × own ( 1 -  corporate tax ) × ( 1 - personal tax )

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