It is March 2013 and Apple, Inc. is preparing its first corporate bond offering.

Question

It is March 2013 and Apple, Inc. is preparing its first corporate bond offering. Apple, Inc. is planning to issue a total of $100 million face value, 10 year semi-annual coupon bonds. The bonds are expected to be placed at $102 per $100 par value. The coupon rate on the bonds is 4%. At the time, Apple stock was trading at $65 with 6 billion total shares outstanding. Apple's effective tax rate is 25%. The beta of Apple was 1.2, the risk free return was 2% and the average market return was 13%. What is the weighted average cost of capital (WACC) after the bonds are issued? (Carry all intermediate calculations to FOUR decimal points)

Explanation / Answer

AFTER TAX COST OF DEBT

= COUPON RATE * (1 - TAX RATE)

= 4% * (1 - 0.25)

= 3%

COST OF EQUITY

= Rf + BETA * MARKET RISK PREMIUM

= 2% + 1.2 * 13%

= 17.6%

MARKET VALUE OF DEBT ($102 * 1000000) = $102000000

MARKET VALUE EQUITY ($65 * 60000000) = $3900000000

WEIGHT OF DEBT ($102000000 / $4002000000) = 0.2549

WEIGHT OF EQUITY (1 - 0.2549) = 0.7451

WACC = WEIGHT * COST OF DEBT + WEIGHT * COST OF EQUITY

= 0.2549 * 3% + 0.7451 * 17.6%

= 0.7647 + 13.1138%

= 13.8605%

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