Question

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. #4 = 6%, and #5 = 6.85% to calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%. (Using excel and making formulas viewable)

The average cost of equity of Google is 19.04%.

The cost of Google’s preferred stocks if it is currently priced at $100 is 6%.​​​​​​​

The pre-tax cost of debt of Google is 6.85%.​​​​​​​

Answer 1

SOLUTION :

We are given the followings in the question:

Cost of Equity (r_e) = 19.04%

Cost of Preferred Stocks (r_p) = 6%

pre tax cost of debt (r_d) = 6.85%

Market Value of Equity (E) = 5,000,000 shares * 100

(E) = $ 500,000,000

(Note: Market prices is assumed as $100 as it is not given in the sum)

Market Value of Preferred Stock (P) = 1,000,000 shares * 100

(P) = $ 100,000,000

(Note: Market price for preferred stocks is given $100 in the sum)

Market Value of Debt (D) = 1,00,000 bonds * 100

(D) = 10,000,000

(Note: market price is assumed $100 as it is not given in the sum)

E+P+D = 500,000,000+100,000,000+10,000,000 = $ 610,000,000

Tax rate (t) = 35%

CALCULATION OF WACC (WEIGHTED AVERAGE COST OF CAPITAL):

WACC =

=

= 15.61 % + 0.98 % + 0.07

= 16.66 %

Hence WACC is 16.66%.