Question

You want to estimate the Weighted Average Cost of Capital (WACC) for Costco Corp. The company’s tax rate is 21% and it has the equity beta of 0.9. Its debt value is $14,727 million and the equity market value is $138,394 million. Its interest expense is $150 million. Assume that the risk-free rate is 3% and the market return is 10%. Based on the information, compute the WACC for Costco.

Answer #1

**Ans : Weighted Average Cost of Capital
(WACC)**

WACC = E / V * Re + D / V * Rd

where,

E = Value of Equit

D = Value of Debt

V = Value of the Firm

Re= Return on Equity

Rd = Return on Debt

Below figures are in millions

WACC = **{**138,394 / 153,121 (Note 1) * 9.3 % (Note
2) **}** **+** **{**14,727 /
153,121 (Note 1) * 0.80464 % (Note 3) **}**

= ( 0.90382 * 9.3 % ) + ( 0.096179 * 0.80464% )

= 8.4055 % + 0.07739 %

= **8.4829 %**

**Note 1 : Value of the Firm =** Value of Equity +
Value of Debt

= $ 138,394 + $ 14, 727

= $ 153,121

**Note 2 : Return on Equity**

Re = Risk Free Rate + Beta * ( Market Return - Risk Free Rate
)

= 3% + 0.9 * ( 10% - 3% )

= 3% + 0.9 * ( 7% )

= 3% + 6.3%

= 9.3%

**Note 3 : Return on Debt**

Interest Expense after Tax = Interest Expense - Tax Rate

= 150 M - 21%

= $ 118.5 M

Rd = ( Interest Expense
after Tax / Value of Debt ) * 100

= ( 118.5 / 14,727 ) * 100

= 0.80464 %

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