WACC (Weighted Average Cost of Capital) is defined by the fromula as:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
E- Market value of the firm's equity: The firm's equity book value is $97,280 millions. In order to get its market value we need to multiple the number ofshares outsatanding by the stock price. The number of shares outstanding as of december 31th 2006 are 2,951 millions and its stock price was $44.11, so its markets value as of the end of 2006 was $130,168.61 millions.
D- Market value of the firm's debt is $79,508 millions.
V- E+D= 130,169+79,508=209,677.
Re - cost of equity: We will calculate the cost of equity by using the CAPM model- E(Re)= Rf+βi*(Rm-Rf). Rf measures the rate of riskless rate of return. βi measures the market risk of a security or an asset i. It measures how much risk a single security adds to the market protfolio. The difference between Rm and Rf mesures the risk premium on the asset. The company's beta is 1.25, the Rf (riskless rate of return) is measured by the rate of Treasury bond yields. The yield that we chose is 6.4% that refelcts the average excess return in the period of 1987-2006. According to this figures the cost of equity is 12.65%.
Rd- cost of debt- Is the current Yield to Maturity on the bond- it is the IRR on the company's bonds. The rate is compounded by adding the consolidated spread to treasury (which is 1.62%) to Yield to Maturity for U.S Treasury bonds (4.66%). We took the rate of a 10-Year Maturity because we think that...
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