Question

Time Warner shares have a market capitalization of $70 billion. The company is expected to pay a dividend of $0.25 per share and each share trades for $30. The growth rate in dividends is expected to be 8​%per year. ​ Also, Time Warner has $20 billion of debt that trades with a yield to maturity of 7​%. If the​ firm's tax rate is 35​%, compute the​ WACC?  

A. 7.49​%

B. 6.7​%

C. 7.88​%

D. 7.09​%

Please show your work on excel

Answer 1

ANSWER IS C 7.88%

here is excel solution for this step by step

using dividend discount model			share price =	dividend expected/ (cost of capital - growth rate)
			30=	0.25/(c-8%)
			c-8%=	0.25/30
			c-8%=	0.00833
			c=	0.088333333
			cost of equity =	8.83%
			cost of debt =	YTM(1-tax rate)
			=	7% x (1-35%)
			cost of debt =	4.55%
			total capital=	70+20=	90
			WACC =	(weight of equity x cost of equity )+ (weight of debt x cost of debt)
			WACC =	((70/90) x 8.83%) + ((20/90) x 4.55%)
			WACC =	0.078788889
			WACC =	7.88%