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Aleks04 [339]
3 years ago
8

Time Warner shares have a market capitalization of billion. The company is expected to pay a dividend of per share and each shar

e trades for . The growth rate in dividends is expected to be ​% per year. ​ Also, Time Warner has billion of debt that trades with a yield to maturity of ​%. If the​ firm's tax rate is ​%, compute the​ WACC?
Business
1 answer:
Ad libitum [116K]3 years ago
4 0

Complete Question:

Time Warner shares have a market capitalization of $50 billion. The company is expected to pay a dividend of $0.30 per share and each share trades for $30. The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $15 billion of debt that trades with a yield to maturity of 8%. If the firm's tax rate is 30%, what is the WACC?

Answer:

7.5%

Explanation:

We can calculate WACC using the following formula:

WACC = Ke * MV of Equity / (MV of Equity  + MV of Debt)    +   Kd * MV of Debt / (MV of Equity  + MV of Debt)

Here:

Market Value of Equity is $50 billion

Market Value of Debt is $15 billion

Ke is % <u>(Step 1)</u>

Kd is 8%

By putting values, we have:

WACC =  8.07% * $50 Billion / ($50 Billion + $15 Billion)     +  8% * $50 Billion / ($50 Billion + $15 Billion)

WACC = <u>7.5%</u>

<u></u>

<u>Step 1: Calculate Ke</u>

We can calculate Ke using the following formula:

Ke = Do * (1 + g) / P               + g

Here

Do is the dividend per share which is $0.3

g is the growth rate which is 7%

And

P is the market value of share which is $30 per share.

Ke = $30 * (1 + 7%) / $30     +  7%   =  8.07%

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