Question

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

Answer 1

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%