Trying to compute the WACC of IBM (International Business Machines Corp.) with t
ID: 2708682 • Letter: T
Question
Trying to compute the WACC of IBM (International Business Machines Corp.) with the following information. For finding the cost of equity, I chose to use the CAPM as a proxy.
V = total equity + total debt (short-term and long-term)
V = 20,008 + (7,702 + 28,478) = 56,188.
CAPM: risk-free rate + beta(expected market return
Trying to compute the WACC of IBM (International Business Machines Corp.) with the following information. For finding the cost of equity, I chose to use the CAPM as a proxy. V = total equity + total debt (short-term and long-term) V = 20,008 + (7,702 + 28,478) = 56,188. CAPM: risk-free rate + beta(expected market return - risk-free rate) CAPM = 0.288 + [0.64(0.1346 - 0.288)] = 0.189824 approx. 18.98% Tax Rate: 18.7% Beta: 0.64 The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Weighted Average Cost Of Capital (WACC) Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rateExplanation / Answer
cost of debt is tax deductible.
which is equal tocost of debt - cost of debt*tax rate
= cost of debt(1- tax rate)