Question

General Electric (GE) has debt valued at 283.00 billion on its balance sheet, while the market value of its common stock is roughly 318.00 billion. If the yield to maturity on the debt is 5.96%, and the cost of equity for the firm is 10.00%, find the WACC for GE if the tax rate for the firm is 35.00%.

Answer 1

To calculate the Weighted Average Cost of Capital (WACC) for General Electric (GE), you need to consider the cost of debt, cost of equity, market value of debt, market value of equity, and the corporate tax rate.

Here's how the components are defined:

1. **Market Value of Debt (D)**: This is the total value of GE's debt.
- \( D = 283.00 \, \text{billion} \)

2. **Market Value of Equity (E)**: This is the total market value of GE's common stock.
- \( E = 318.00 \, \text{billion} \)

3. **Total Market Value of the Firm (V)**: This is the sum of the market value of debt and the market value of equity.
\[
V = D + E = 283.00 + 318.00 = 601.00 \, \text{billion}
\]

4. **Cost of Debt (r_d)**: This is the yield to maturity on the debt.
- \( r_d = 5.96\% = 0.0596 \)

5. **Cost of Equity (r_e)**: This is the cost of equity for the firm.
- \( r_e = 10.00\% = 0.10 \)

6. **Tax Rate (T)**: This is the tax rate for the firm.
- \( T = 35.00\% = 0.35 \)

### WACC Formula

The formula for WACC is as follows:

\[
\text{WACC} = \left( \frac{E}{V} \times r_e \right) + \left( \frac{D}{V} \times r_d \times (1 - T) \right)
\]

### Calculation Steps

1. **Calculate the weight of equity (\(\frac{E}{V}\))**:
\[
\frac{E}{V} = \frac{318.00}{601.00} \approx 0.528
\]

2. **Calculate the weight of debt (\(\frac{D}{V}\))**:
\[
\frac{D}{V} = \frac{283.00}{601.00} \approx 0.472
\]

3. **Calculate the after-tax cost of debt**:
\[
r_d \times (1 - T) = 0.0596 \times (1 - 0.35) = 0.0596 \times 0.65 \approx 0.03874
\]

4. **Now, substitute into the WACC formula**:
\[
\text{WACC} = \left( 0.528 \times 0.10 \right) + \left( 0.472 \times 0.03874 \right)
\]

5. **Calculate the contributions**:
\[
\text{WACC} = 0.0528 + (0.472 \times 0.03874) = 0.0528 + 0.01828 \approx 0.07108
\]

6. **Final WACC Calculation**:
\[
\text{WACC} \approx 0.0711 \text{ or } 7.11\%
\]

### Conclusion

The Weighted Average Cost of Capital (WACC) for General Electric is approximately **7.11%**.