Part A: Weighted Average Cost of Capital (WACC) Company: JOHNSON & JOHNSON Here
ID: 2743949 • Letter: P
Question
Part A: Weighted Average Cost of Capital (WACC)
Company: JOHNSON & JOHNSON
Here again is the formula for WACC. For simplicity the term for preferred stock has been removed Name of Com Ticker Symbol Stock WACC Cost of debt, in Corporate tax rate, Tc Total debt, D Total Total firm value, V Cost ofe CAPM Components Beta, Historical market return, i Risk-free rate Assumed 11% Assumed 3% 1. Using data in the table confirm the accuracy of the site's WACC calculation: Weight of Equity Weighted Average+D Cost of Equity Weight of Debt iE Pre-Tax Weighted Average Cost of Deb+D After-Tax Weighted Cost of Debt io Weighted Average Cost of|-4+ Capital --le-(1-T)Explanation / Answer
Name of The Company JOHNSON & JOHNSON Ticker Symbol JNJ (NYSE) WACC Cost Of Debt iD (Interest Expense / latest two-year average debt)= $552,000,000/$19.31B 2.86% Corporate Tax Tc 2 year Average Tax Rate [(3,787,000/19,196,000)+(4,240,000/20,563,000)]/2 20.18% Total Debt D = 2 year average Short-Term Debt and Long-Term Debt Short term Debt = (7,004,000 +3,638,000/2) $5.32 Billions Long Term Debt = (12,857,000 + 15,122,000)/2 $13.99 Billions Total Debt D = $19.31 Billions Total Equity E $343.17 Bilions Total Firm Value V = (D+E) $362.48 Billions Cost of Equity iE using CAPM calculated Below 9.40% Beta 0.8 Market Return iM 11.00% Risk Free rate Rf 3.00% Cost of Equity = iF + Beta x (iM - rF)= 3% + .80 x(11%-3%) 9.40% Weight of Equity = E/(E+D) 94.67% Weighted Average Cost Of Equity = (94.67% x 9.40%) 8.90% Weight Of Debt = D/(E+D) 5.33% Pretax Weighted average cost of debt = 5.33% x 2.86% 0.15% After tax Weighted average cost of Debt = 0.15%*(1-20.18%) 0.12% WACC= 8.90% + .12% 9.02%