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17 March, 03:14

Assuming a risk-free rate of 1% and a 3% yield to maturity on its bonds, what is Coca-Cola Company's cost of capital? Assume a 7.5% Market Risk Premium (MRP). Book value of debt is 47.75 Billion, stock price is 42.32, and there are 4255.2 million shares outstanding. Tax rate is 20%. Coca-Cola's beta is 0.57.

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  1. 17 March, 03:32
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    4.67%

    Explanation:

    Data provided in the question:

    Risk-free rate = 1% = 0.01

    yield to maturity on bonds = 3% = 0.03

    Market Risk Premium = 7.5% = 0.075

    Book value of debt = 47.75 Billion

    Stock price = $42.32

    shares outstanding = 4255.2 million

    Tax rate = 20%

    Beta = 0.57

    Now,

    Weighted average cost of capital

    = (Weight of debt * after tax cost of debt) + (weight of equity * cost of equity)

    also,

    Expected return = Risk free rate + beta * market risk premium

    = 1% + (0.57 * 7.5%)

    = 5.275%

    Total value of equity = Stock price * Shares outstanding

    = $42.32 * 4255.2 million

    = $180.08 billion

    Therefore,

    WACC

    = [47.75 : (180.08 + 47.75) ] * 3% * (1 - 20%) + [180.08 : (180.08 + 47.75) ] * 5.275%

    = (0.209 * 0.03 * 0.8) + (0.79 * 0.05275)

    = 0.005016 + 0.0417

    = 0.0467

    or

    = 0.0467 * 100%

    = 4.67%
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