3. Assuming a risk-free rate of 1% and a 3% yield to maturity on its bonds,...

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Question

3. Assuming a risk-free rate of 1% and a 3% yield to maturity on its bonds,...

3. Assuming a risk-free rate of 1% and a 3% yield to maturity on its bonds, what is Coca-

Cola Company’s cost of capital? Assume a 7.5% Market Risk Premium (MRP). Book value

of debt is 47.75 Billion, stock price is 42.32, and there are 4255.2 million shares

outstanding. Tax rate is 20%. Coca-Cola’s beta is 0.57

business finance

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Answer 1

Answer #1

WACC = weight of debt * after tax cost of debt + weight of equity * cost of equity

Expected return = risk free rate + beta * market risk premium

= 1% + 0.57 * 7.5%

= 5.275%

value of debt = 47.75 billion

value of equity = 42.32 * 4255.2

= 180.080064 billion

WACC = 47.75/(180.080064+47.75) * 3% * (1-0.2) + 180.080064/(180.080064+47.75) * 5.275%

= 4.67%

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Answer 2

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