Please show work for rating. I have answered questions A and B but need help on
ID: 2762831 • Letter: P
Question
Please show work for rating. I have answered questions A and B but need help on question C.
Estimating Cost of Capital Measures
Harley Davidson, Inc. (HOG) has $5.1 billion in total debt (which approximates its market value). Interest expense for the year was about $46.0 million. The company's market capitalization is approximately $11.0 billion, its market beta is 2.16, and its assumed tax rate is 37%. Assume that the risk-free rate equals 2.5% and the market premium equals 5%. Rounding Instructions: Do not round until your final answers. Round answers to one decimal place.
(a) Estimate Harley Davidson's cost of debt capital.
0.6%
(b) Estimate Harley-Davidson's cost of equity capital.
13.3%
Explanation / Answer
Answer based on (a) and (b)
Cost of equity = 13.3%
Cost of debt = 0.6%
Total value of debt = $5.1 billion
Value of equity = $11 billion
WACC is calculated below using
WACC = [5.1 / (5.1 +11) × 0.6%] + [11 / (5.1 + 11) × 13.3%]
= 31.68% × 0.6% + 68.32% × 13.3%
= 0.19% +9.09%
= 9.28%
Hence, WACC of Harley Davidson, Inc. is 9.28%.