Question

# You want to estimate the Weighted Average Cost of Capital (WACC) for Costco Corp. The company’s...

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.

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 %