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:
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Market Value of Debt (D): This is the total value of GE's debt.
- \( D = 283.00 , \text{billion} \)
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Market Value of Equity (E): This is the total market value of GE's common stock.
- \( E = 318.00 , \text{billion} \)
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Total Market Value of the Firm (V): This is the sum of the market value of debt and the market value of equity. \[ V = D + E = 283.00 + 318.00 = 601.00 , \text{billion} \]
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Cost of Debt (r_d): This is the yield to maturity on the debt.
- \( r_d = 5.96% = 0.0596 \)
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Cost of Equity (r_e): This is the cost of equity for the firm.
- \( r_e = 10.00% = 0.10 \)
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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
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Calculate the weight of equity (\(\frac{E}{V}\)): \[ \frac{E}{V} = \frac{318.00}{601.00} \approx 0.528 \]
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Calculate the weight of debt (\(\frac{D}{V}\)): \[ \frac{D}{V} = \frac{283.00}{601.00} \approx 0.472 \]
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Calculate the after-tax cost of debt: \[ r_d \times (1 - T) = 0.0596 \times (1 - 0.35) = 0.0596 \times 0.65 \approx 0.03874 \]
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Now, substitute into the WACC formula: \[ \text{WACC} = \left( 0.528 \times 0.10 \right) + \left( 0.472 \times 0.03874 \right) \]
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Calculate the contributions: \[ \text{WACC} = 0.0528 + (0.472 \times 0.03874) = 0.0528 + 0.01828 \approx 0.07108 \]
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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%.
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