Stephanie Parrillo Week 11 Assignment For Target Corp. (TGT) compute the company's weighted average cost of capital (WAAC). Each of you will likely get a slightly different answer depending on how you use the financial information you can find. For the cost of equity the traditional formulas are the dividend capitalization model and the capital asset pricing model. I'm less interested in you getting perfect data than I am in you coming up with a computation and then interpreting what you can do with that number.
Cost of equity Ke = Rf + (Rm - Rf) x beta Rf is risk free rate Rm is market return Ke is the cost of equity. Beta = 0.63 Rf is 10 year treasury yield which is 2.90% Rm= Average market return is 7.62% Ke= 2.90 + (7.26- 2.90) x 0.63 5.6468 Ke =5.6468
Cost of Debt Also assume tax rate to be 30%. Amount of interest expense/long term debt Interest expense = -543,000 Long term debt = 11,317 Before tax cost of debt = 543/11317 = 4.80% After tax cost of debt (Kd) = before tax cost x (1- tax rate) (Kd) = before tax cost x (1- tax rate)
Now you can calculate the WACC. Where Kd is after tax cost of debt, Wd is weight of debt, Ke is cost of equity and We is weight of equity. You need to find the weights (Wd and We) before calculating WACC.Long term debt = 11,317 Amount of equity = 533.14 million shares x 82.68 Amount of Equity= 44080 million Weight of Equity (We) = Amount of equity/ (Amount of equity + amount of debt) 44080 / (44080 + 11317) We= 0.795710959 0.795710959 Weight of Debt (wd) = 11317 / 55397 please divide 0.204289041 Wd = 204289041
How can I solve for WACC i seem to be doing something wrong and missing something