Question

Assume Time Warner shares have a market capitalization of $40 billion. The company is expected to pay a dividend of $0.25 per share and each share trades for $40. The growth rate in dividends is expected to be 7% per year. Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 9%. If the firm's tax rate is 40%, what is the WACC

Answer 1

6.88%

Step-by-step explanation:

cost of equity = (next period dividend / by price) + growth rate in dividends.

cost of debt = yield to maturity x (1 - tax rate)

WACC = weight of debt x cost of debt + weight of equity x cost of equity.

cost of equity = ($0.25 / $40) + 0.07

= 0.07625

cost of debt = 0.09 x (1 - 0.4)

=0.054

WACC = ($40Billion x 0.07625) / 60billion + ($20 billion x 0.054) / $60billion

= 0.05083 + 0.018

= 0.0688 or 6.88%