Business, 15.04.2020 19:56, vicsmi4573

Assume the market value of Apple’s equity, preferred stock, and debt are $6 billion, $2 billion, and $12 billion, respectively. Apple has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. Apple’s preferred stock pays a dividend of $4 each year and trades at a price of $40 per share. Apple’s debt trades with a yield to maturity of 8.0%.

What is Apple’s weighted average cost of capital if its tax rate is 30%?

A. 9.95%

B.9.34%

C.10.43%

D.11.38%

Answers: 3

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Answers

answered: bensleytristap93y8q

9.34%

Explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs.

According to WACC formula

WACC = ( Cost of equity x Weightage of equity ) + ( Cost of preferred stock x Weightage of preferred stock ) + ( Cost of debt ( 1- t) x Weightage of debt )

Weightage

Equity = $6 billion / $20 billion = 30%

Preferred Stock = $2 billion / $20 billion = 10%

Debt = $12 billion / $20 = 60%

Total Market Value = $6 billion + $2 billion + $12 billion = $20 billion

Cost of equity

Capital asset pricing model measure the expected return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for CAPM

Cost of equity = Risk free rate + beta ( market risk premium )

Cost of equity = 3% + 1.7 (8%) = 16.6%

Cost of Preferred share = (4 /40) x 100 = 10%

Cost of Debt = YTM = 8.0%

Placing values in WACC formula

WACC = ( 16.6% x 30% ) + ( 10% x 10% ) + ( 8% ( 1- 30%) x 60% )

WACC = 4.98% + 1% + 3.36% = 9.34%

answered: Guest

The business cycle is the periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real gross domestic product (gdp) and other macroeconomic variables. a business cycle is typically characterized by four phases—recession, recovery, growth, and decline—that repeat themselves over time. economists note, however, that complete business cycles vary in length. the duration of business cycles can be anywhere from about two to twelve years, with most cycles averaging six years in length. some business analysts use the business cycle model and terminology to study and explain fluctuations in business inventory and other individual elements of corporate operations. but the term "business cycle" is still primarily associated with larger (industry-wide, regional, national, or even international) business trends.

answered: Guest

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Assume the market value of Apple’s equity, preferred stock, and debt are $6 billion, $2 billion, and...