Time Warner shares have a market capitalization of $ 45 billion. The company just paid a dividend of $ 0.25 per share and each share trades for $ 35. The growth rate in dividends is expected to be 8% per year. Also, Time Warner has $ 10 billion of debt that trades with a yield to maturity of 7%. If the firm's tax rate is 40%, compute the WACC?

WACC = 7.89%

Explanation:

Lets find "cost of equity" first.

The formula is:

Which is basically the next year dividend divided by  stock price summed with growth rate. So cost of equity is:

Now, "cost of debt":

Formula is:

Which is the yield to maturity times "1 - tax rate", so it will be:

WACC formula is:

Where

W_e is weight of equity, which is 45/(45+10) = 45/55 = 9/11

W_d is weight of debt, which is 10/(45+10) = 10/55 = 2/11

Now, wacc is:

In percentage, 0.0789 * 100 = 7.89%

WACC = 7.89%

answer; foreign exchange transaction;