Question

QUESTION 5 Lululemon Athletica has a current share price of $52.50, and a market capitalization of $7 billion. The company is expected to pay a dividend of $0.20 per share, with a dividend growth rate of 3% per year. The firm has $4 billion of debt with a yield to maturity of 7%. If the firm's tax rate is 25%, what is Lululemon's WACC? 1.3.94% 2.3.82% 3.4.33% 4.4.07% QUESTION 6 Lululemon Athletica has a current share price of $50, and a market capitalization of $7 billion. The firm's beta is 0.27, the risk-free rate is 2.4%, and the market risk premium is 6%. The firm has $4 billion of debt with a yield to maturity of 8%. If the firm's tax rate is 35%, what is Lululemon's WACC? 1.4.45% 2.4.61% 3.4.71% 4.6.01%

Simple steps please

Answer 1

1) First of all lets calculate cost of equity
Cost of equity = Dividend for next period/Po + g
Dividend for next period = 0.2$
Po = Current market price = 52.5$
g = growth rate = 3%
Cos t of equity = 0.2/52.5 + 0.03
=0.0038 + 0.03
=0.0338
=3.38%
Now, we shall calculate after tax cost of debt
After tax cost of debt = YTM(1-tax rate)
= 7%(1-0.25)
=7%(0.75)
=5.25%

Statement showing WACC

Particulars (Figure in billion)	Amount	Weight	Cost of capital	WACC
	a	b	c =axb
Equity	7.00	64%	3.380%	2.15%
Debt	4.00	36%	5.250%	1.91%
	11.00			4.07%

Thus WACC = 4.07%

2) First of all lets calculate cost of equity
CAPM = Risk free rate of return+ beta(Market risk premium)
= 2.4% + 0.27(6%)
=2.4% + 1.62%
= 4.02%
Now, we shall calculate after tax cost of debt
After tax cost of debt = YTM(1-tax rate)
= 8%(1-0.35)
=8%(0.65)
=5.20%

Statement showing WACC

Particulars (Figure in billion)	Amount	Weight	Cost of capital	WACC
	a	b	c =axb
Equity	7.00	64%	4.020%	2.56%
Debt	4.00	36%	5.200%	1.89%
	11.00			4.45%

Thus WACC = 4.45%