Question

Calculate the cost of capital (WACC) for cvs company. Risk and cost of capital.

Please what else do you need?

Answer 1

WACC for CVS = E/(E+D)* cost of equity + D/(E+D)*cost of debt*(1-tax rate)

We will first compute cost of equity through the CAPM model. Cost of equity = risk free rate + beta*(market return - risk free rate)

Beta for CVS = 1.19, market return - risk free rate = 6% and risk free rate is 2.48% (all the data have been obtained from Bloomberg)

Thus cost of equity = 2.48% + (1.19*6%) = 9.62%

Next we compute the cost of debt. Cost of debt = interest expense/average debt = 2619/50215.5 = 5.2155% (these data points have been obtained from Bloomberg)

Now we take weights of equity and debt i.e. E/E+D and D/E+D. The figures are 0.5797 and and 0.4203 and these are also obtained from Bloomberg.

Thus WACC = 0.5797*9.26% + 0.4203 * 5.2155%*(1-0.81095)

(note that 0.81095 is the tax rate for CVS)

The above formula yields a WACC of 5.99%