Financial Analysis Exercise IV Part A: Weighted Average Cost of Capital (WACC) G

Question

Financial Analysis Exercise IV

Part A: Weighted Average Cost of Capital (WACC)

Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled “Calculate WACC.”

Complete the following tables:

Name of Company/Stock

Johnson & Johnson

Ticker Symbol

JNJ

From the http://thatswacc.com/ results for your company:

WACC

2.76%

Cost of debt, iD

-1.50%

Corporate tax rate, TC

35.82%

Total debt, D

?

Total equity, E

?

Total firm value, V

?

Cost of equity, iE

4.78%

CAPM Components

Beta, ?

Historical market return, iM

Assumed 11%

Risk-free rate, iF

Assumed 3%

Using data in the table confirm the accuracy of the site’s WACC calculation:

Weight of Equity

Weighted Average Cost of Equity

Weight of Debt

Pre-Tax Weighted Average Cost of Debt

After-Tax Weighted Cost of Debt

Weighted Average Cost of Capital

Name of Company/Stock

Johnson & Johnson

Ticker Symbol

JNJ

Explanation / Answer

Total Debt = $25,241,500 + $20,433,500 = $ 45675000

As per CAPM

Re= Rf + (Rm-Rf) * beta =

4.78% = 3 + beta (11-3)

beta = 0.2225

Debt represents 35.12% of Total Value

So Equity is 64.88%

Value of Equity = (64.88% X 45675000)/35.12% = 84379100

Enterprise Value = 130054100

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