Question

The beta for Caterpillar is 1.58 and the beta for Colgate is 0.43. The annual return for the SP 500 is 10.5% and the risk free rate is 0.28%.For Caterpillar, we have the following data: Yield to maturity of the bonds issued by the company: 2.4% beta : 1.58 Tax rate : 35% Long Term Debt : 16,243 million Dollars Number of shares outstanding : 583.4 million shares Price per share : 80 Dollars per share

Please help me with calculating the stock return and calculating the WACC in percent for caterpillar.

Answer 1

Using the CAPM model we can calculate the stock return for caterpillar
Required return = Risk free rate + Beta*(Market return - risk free rate)
Required return = 0.28% + 1.58*(10.5% - 0.28%)
Required return	16.43%
The after tax yield to maturity = 2.4%*(1-0.35)
The after tax yield to maturity	1.56%
The WACC for caterpillar is	Weight of equity*cost of equity + Weight of debt*Cost of debt
The WACC for caterpillar is	(74.18%*16.43%) + (25.82%*1.56%)
The WACC for caterpillar is	12.59%
Calculation of weight for equity and debt
Equity (583.4*80)	46672
Debt	16243
Total finance	62915
Weight of equity (46672/62915)	74.18%
Weight of debt (16243/62915)	25.82%
Therefore the stock return is 16.43% and WACC is 12.59%