Lululemon Athletica has a current share price of $52.50,and a market capitalization of $7 billion.The company is expected to pay a dividend of $0.20 per share,with a dividend growth rate of 3% per year.The firm has $4 billion of debt with a yield to maturity of 7%.If the firm's tax rate is 25%,what is Lululemon's WACC?

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtT = tax rateIn this case, we have:E = $7 billionV = $7 billion + $4 billion = $11 billionRe = 3% + (52.50 - 0.20) / 52.50 * 3% = 3.94%D = $4 billionRd = 7%T = 25%Therefore, the WACC is:WACC = (7/11) * 3.94% + (4/11) * 7% * (1 - 0.25) = 4.07%

Lululemon Athletica Has a Current Share Price of $52