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?

The answer is 5.43% but I am not sure how my prof got to that number.

Answer 1

The WACC formula is given as:

WACC = Rd x (1-T) x D/(D+E) + Re x E/(D+E)

where Rd and Re are the costs of debt and equity respectively and D and E are the debt and equity amounts.

So, here to get the cost of equity, we need to use the Gordon Growth formula which is given as:

Price per share = Div x (1+g)/(Re-g)

12 = 0.25 x 1.04/(Re - 0.04)

Re = 6.1667%.

And the cost of debt is given to be 6% (before-tax).

Hence, the WACC will be =

6 x (1-0.4) x 20/70 + 6.1667 x 50/70 = 5.43%.