Question

Using information below, calculate the "domestic" cost of equity for AK Corporation:      
      
U.S. Treasury Yield   3.24%  
Average Return of the U.S. Stock Market   9.40%  
Average Return of the Global Stock Market   10.79%  
Beta Coefficient of AKC vs S&P 500   0.84  
Beta Coefficient of AKC vs Global Stock Market   1.02  
The Yield on Composite of Global Risk-Free Assets   2.79%  
      
      
Using information below, calculate the "global" cost of equity for AK Corporation:     
      
U.S. Treasury Yield   3.24%  
Average Return of the U.S. Stock Market   9.40%  
Average Return of the Global Stock Market   10.49%  
Beta Coefficient of AKC vs S&P 500   0.84  
Beta Coefficient of AKC vs Global Stock Market   1.02  
The Yield on Composite of Global Risk-Free Assets   2.79%  
      
      
Using information below, calculate the cost of debt for AK Corp:      
      
Average Yield to Maturity on Outstanding Debt   8.25%  
Effective Tax Rate   32.15%  
      
      
      
Using information below, calculate the weighted average cost of capital      
for AKC's global operations:     
      
AKC Cost of Debt   6.10%  
AKC Cost of "Domestic" Equity   9.31%  
AKC Cost of "Global" Equity   12.14%  
Value of Outstanding Equity (in Millions)   11,461 €  
Value of Outstanding Debt (in Millions)   4,584 €  

Answer 1

cost of equity = risk free rate + (beta * (average market return - risk free rate))

domestic cost of equity = 3.24% + (0.84 * (9.40% - 3.24%)) = 8.4144%

global cost of equity = 2.79% + (1.02 * (10.49% - 2.79%)) = 10.644%

cost of debt = YTM * (1 - tax rate)

cost of debt = 8.25% * (1 - 32.15%) = 5.597625%

WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)

weight of debt = value of debt / (value of debt + value of equity)

weight of equity = value of debt / (value of debt + value of equity)

weight of debt = 4,584 / (4,584 + 11,461) = (4,584 / 16,045)

weight of equity = 11,461 / (4,584 + 11,461) = (11,461 / 16,045)

WACC = ((4,584 / 16,045) * 6.10%) + ((11,461 / 16,045) * 12.14%)

WACC = 10.4144%