Answer to Question #285174 in Finance for Anu

Question

Estimating Cost of Capital (WACC)

• What is the book value of debt and equity?

• What are the weights of debt and equity?

• What is the cost of capital?

• What is the weighted average cost of capital for the firm? (Assume tax rate is 35%)

*It is to be done for Apple Inc for the year 2019 and 2020*

Answer 1

Book value of debt: the sum of the total debt recorded in its balance sheet and is useful in calculating of Liquidity ratios of the firm.

Book value of equity is the equivalent of total assets less total liabilities and preferred equity. The Book value of equity represents the equity of shareholders (from a balance sheet perspective) less the preferred stock.

Weight of debt is simply defined as the percentage of debt of the total capital structure of the company. In other words, the weight of debt shows the ratio of debt that is taken on by the company.

 The weight of equity is calculated by dividing the market value of the company's equity by sum of the market values of equity and debt.

Cost of capital represents the return a company needs to achieve in order to justify the cost of a capital project, such as purchasing new equipment or constructing a new building. Cost of capital encompasses the cost of both equity and debt, weighted according to the company's preferred or existing capital structure.

The weighted average cost of capital is one way to arrive at the required rate of return—that is, the minimum return that investors demand from a particular company.