Question

the Weighted Average Cost of Capital (WACC) for a firm can be calculated or found through research. Select two firms in the same industry. The industry may be that in which you currently work or it may be an industry in which you are interested. Calculate or find the WACC for the two firms. How do the WACCs compare? Are the WACCs what you would expect? What causes the differences between the two firms' WACCs?

Answer 1

Soln : We are considering the industry here for mobile manufacturer and firms are Apple and Motorola Solutions.

Now, Lets calculate the WACC of the Apple :

WACC = E/(E+D) * cost of equity + D/(E+D) * cost of debt *(1-tax rate)

Here, E = value of equity or we can say market capitalization = $872480 million

D = Total book value of debt = $ 101356mn

Cost of equity can be calculated using CAPM model with market risk premium = 6% , beta of the apple = 1.31, and risk free rate = 2.65%

So, Cost of equity = 2.65 + 1.31*6% = 10.51%

Similarly for cost of Debt can be calculated by using the interest expense/cost of debt, we will get 2.29%

So, WACC for apple = 872480/(872480+101356) * 10.51 + 101356/(872480+101356) * 2.29 *(1-0.25)

0.25 is corporate tax

WACC = 0.896 *10.51 + 0.104*2.29 *.75 = 9.59%

Similarly we will calculate for Motorola Solutions

Value of Equity , market capitalization = $16038 mn, Book value of debt = $4372.5 mn

Cost of equity = 2.65 +6*0.36 = 4.61% , as beta for company = 0.36

cost of debt = 225/4372.5 = 5.15%

Now, WACC can be calculated = 16038/(16038+4372.5) * 4.61 + 4372.5/(16038+4372.5) *5.15 *(1-.25)

WACC = 0.79 *4.61 + 0.21*5.15*0.75 = 4.46%

WACC is defined as the cost of capital that is part of the company, lower it is better it will be as cost needs to be paid for the capital raised.

We can see here that the beta of the company Motorola is very less as compare to Apple and that gives its cost of equity very less due to which we can say the cost of capital is not much.