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Assuming a risk-free rate of 1% and a 3% yield to maturity on its bonds, what is Coca-Cola Company’s cost of capital? Assume a 7.5% Market Risk Premium (MRP). Book value of debt is 47.75 Billion, stock price is 42.32, and there are 4255.2 million shares outstanding. Tax rate is 20%. Coca-Cola’s beta is 0.57.

Respuesta :

Answer:

4.67%

Explanation:

Data provided in the question:

Risk-free rate = 1% = 0.01

yield to maturity on bonds = 3% = 0.03

Market Risk Premium = 7.5% = 0.075

Book value of debt = 47.75 Billion

Stock price = $42.32

shares outstanding = 4255.2 million

Tax rate = 20%

Beta = 0.57

Now,

Weighted average cost of capital  

= ( Weight of debt × after tax cost of debt ) + ( weight of equity × cost of equity  )

also,

Expected return = Risk free rate + beta × market risk premium

= 1% + ( 0.57 × 7.5% )

= 5.275%

Total value of equity = Stock price × Shares outstanding

= $42.32 × 4255.2 million

= $180.08 billion

Therefore,

WACC

= [47.75 ÷(180.08 + 47.75)] × 3% × (1 - 20%) + [180.08 ÷ (180.08 + 47.75)] × 5.275%

= ( 0.209 × 0.03 × 0.8 ) + ( 0.79 × 0.05275 )

= 0.005016 + 0.0417

= 0.0467

or

= 0.0467 × 100%

= 4.67%

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