Question 4 a) Explain Weighted Average Cost of Capital? b) Apple Company has tot

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Question 4 a) Explain Weighted Average Cost of Capital? b) Apple Company has total debt obligations with book and market values equal to $60 (1 mark) million and S56 million, respectively. It also has total equity with book and market values equal to $40 million and $140 million, respectively. If you were going to buy all of the assets of Apple Company today, how much should you be willing to pay? (4 marks) c) Big Orange Co. just paid a $3.20 dividend on its common shares. If Big Orange is expected to increase its annual dividend by 4 percent per year into the foreseeable future and the current price of Big Orange's common shares is $23.32, what is the cost of common stock for Big Orange? (4 marks d) James Co. is expected to pay a dividend of $2.20 one year from today on its comm shares. That dividend is expected to increase by 10 percent every year thereafter. If the pr of James Co is $27.50, then what is James's cost of common stock? (2 ma e) Amazon has preferred shares outstanding that pay an annual dividend equal to $30 per If the current price of Amazon preferred shares is $214.28, then what is the after-tax c preferred stock for Amazon?

Explanation / Answer

a) WACC stands for the weighted average cost of capital which means the weighted average cost of the capital employed in the company. It refers to the average cost of the total amount of capital employed in the company in the forms of equity, preference shares and the cost of debentures. By WACC it means the average cost accruing to the company in regard to its total capital employed in every form.

c) Price = Dividend (1+growth rate )/ Cost - Growth Rate

23.32= 3.20(1+0.04)/Cost - 0.04

Cost = 0.1827= 18.27%

d) 27.50= 2.20(1+1.10)/Cost- 0.10

Cost= 0.188= 18.80 %

e) Cost of preference shares = Dividend / Current price

30/214.28 = 0.14 = 14%

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