Currently Lowes Inc has debt of 16995 billion equity of 5862

Currently, Lowe\'s Inc. has debt of $16.995 billion, equity of $5.862 billion with no preferred stock. If Lowe\'s has a beta of 1.41 and a YTM of 4.05% on their 30 year bonds, what is their WACC? Assume a risk-fre rate of 2.68% and a broad market return of 9.8%.

Solution

Debt = $16.995 Billion

Equity = $5.862 billion

Total Capital = Debt + Equity = 16.995 + 5.862 = $22.857 Billion

Weight of Equity = 5.862 / 22.857 = 0.256464

Weight of Debt = 16.995 / 22.857 = 0.743536

Cost of debt = 4.05%

Using CAPM equation to calculate cost of equity.

Cost of equity = Risk free rate + beta ( Market return - Risk free rate )

Cost of equity = 2.68% + 1.41 ( 9.8% - 2.68% ) = 2.68% + 1.41 ( 7.12% ) = 12.7192%

As their are no taxes, therefore WACC can be calculated as

WACC = (Weight of Debt x Cost of debt) + (Weight of equity x Cost of equity)

WACC = (0.743536 x 4.05%) + ( 0.256464 x 12.7192%) = 3.011321% + 3.262017% = 6.273338%