Question

For IBM, find the following items (Hint: Try using Yahoo Finance & FINRA) which are required for you to calculate the Weighted Average Cost of Capital (WACC):

• Shares outstanding = 925.794

• Stock price =             $154.76

• Equity =                     $16792000

• Debt =                        $39079250

• Preferred stock         $N/A

• Equity beta                1.06%

• Market risk premium = 5%

• US treasury yield (10-year) = 2.37%

• Cost of equity (CAPM)       7.67...%

• Pre-tax cost of debt = 2.25%      

• Tax rate                                  …………………………..%

• Credit rating                          …………………………

• Cost of preferred stock        …………………………%

• WACC =                               ………………………………..%

Answer 1

Based on given information we calculate WACC as under other answers are highlighted in bold.

WACC = (E / V) × Re + (D / V) × Rd × (1 − Tc)
	(E/V)*Re		(D/V)*Rd		(1-Tc)		WACC
	0.023052042	+	0.015738	X	0.79	=	3.55%
E	$      16,792,000
D	$      39,079,250
V =	E+D=	$          55,871,250
Re=	7.67%
Rd	2.25%
T=	21%	(US Corporate tax rate)
Re = Risk-Free Rate of Return + Beta * (Market Rate of Return – Risk-free Rate of Return)
	Equity Beta=	1.06%

Tax rate = 21% -Assumed for US Corpoations (IBM)

Credit Rating= AAA/Sovereign rating-IBM (Not relevant as cost of debt is provided)