Massive Inc shares have a market capitalisation of $60 billion. The company is expected to pay a dividend of $0.35 per share and each share trades for $30. The growth rate in dividends is expected to be 8% per year. Also, Massive has $15 billion of debt that trades with a yield to maturity of 7%. If the firm's tax rate is 30%, compute the WACC.

Question

Quizplus · Accepted Answer

The WACC is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Here, E = $60 billion, D = $15 billion, V = E + D = $75 billion. Re (cost of equity) can be calculated using the Gordon Growth Model: Re = (D1/P0) + g = (0.35/30) + 0.08 = 0.09167 or 9.167%. Rd (cost of debt) = 7%, Tc (tax rate) = 30%. Plugging these into the WACC formula gives: WACC = (60/75) * 9.167% + (15/75) * 7% * (1-0.3) = 8.31%.

Massive Inc Shares Have a Market Capitalisation of $60 Billion