Question

Calculation of individual costs and WACC BlackRock, Inc. (BLK) has a capital structure that consists of common stock equity and debt. The market capitalization of its equity is $74.428 billion and its debt has a market value of $6.193 billion. A) Calculate the market value weights for BLK's capital structure. B) Calculate BLK's cost of equity using a beta of 1.15, a risk-free rate of 0.64%, and a market risk premium of 6.20%. C) Calculate BLK's cost of debt using a bond price of $1,074.86, semi-annual coupon payment of $35.00, and 10 years to maturity. D) Calculate BLK's current WACC using a 21% corporate tax rate.

Answer 1

To calculate BLK's cost of equity, use the CAPM formula and substitute the given values. To calculate BLK's cost of debt, use the bond yield formula. To calculate BLK's WACC, use the formula and substitute the calculated weights and costs.

Step-by-step explanation:

A) To calculate the market value weights for BLK's capital structure, we need to determine the total market value of the company's equity and debt. The market capitalization of equity is $74.428 billion and the debt has a market value of $6.193 billion. The market value weight of equity is calculated by dividing the market capitalization of equity by the sum of equity and debt market values. Similarly, the market value weight of debt is calculated by dividing the market value of debt by the sum of equity and debt market values.

B) To calculate BLK's cost of equity, we use the capital asset pricing model (CAPM) which takes into account the risk-free rate, the firm's beta, and the market risk premium. The cost of equity can be calculated using the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Risk Premium). Substitute the given values into the formula to calculate the cost of equity.

C) To calculate BLK's cost of debt, we use the bond yield formula. The cost of debt is calculated by dividing the annual coupon payment by the bond price and adding the yield to maturity. The yield to maturity can be calculated using the bond price, coupon payment, and time to maturity.

D) To calculate BLK's current weighted average cost of capital (WACC), we use the formula: WACC = (Cost of Equity * Equity Weight) + (Cost of Debt * Debt Weight), where the equity weight and debt weight are calculated in part A. Use the given corporate tax rate to calculate the WACC.