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

First, we calculate the cost of equity:
Cost of Equity = Dividend Yield + Growth Rate
Dividend Yield = Dividend per Share / Share Price = 0.35 / 30 = 0.0117
Growth Rate = 8%
Cost of Equity = 0.0117 + 0.08 = 0.0917 or 9.17%

Next, we calculate the cost of debt:
Cost of Debt = Yield to Maturity * (1 - Tax Rate) = 0.07 * (1 - 0.3) = 0.049 or 4.9%

Finally, we calculate the WACC as follows:
WACC = (E/V * Cost of Equity) + (D/V * Cost of Debt) * (1 - Tax Rate)
D/V = Debt / (Debt + Equity) = $15 billion / ($15 billion + $60 billion) = 0.2
E/V = Equity / (Debt + Equity) = $60 billion / ($15 billion + $60 billion) = 0.8

WACC = (0.8 * 0.0917) + (0.2 * 0.049) * (1 - 0.3) = 0.0831 or 8.31%

Therefore, the best choice is B.

Massive Inc Shares Have a Market Capitalisation of $60 Billion