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The Discover Company (NYSE: DIS) has debt of a par value of $13 billion and is...

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Finance

The Discover Company (NYSE: DIS) has debt of a par value of $13billion and is currently traded at 98.5% of the par value. Theappropriate cost of debt for Discover is 2.5%, whereas the Treasuryrate is 2%. Discover’s current stock price is $97 per share, andthe company has 1.625 billion shares outstanding. Its equity betais 1.1, and the expected return on the equity market is 8%.Discover has a 35% effective corporate tax rate. What is Discover’scurrent weighted average cost of capital?

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WEIGHTED AVERAGE COST OF CAPITAL
Market value Market value Weight(a) cost (b) Weighted average cost of capital(a*b)
After tax cost of debt 13*98.5%=12.805 12.805/170.43=.07513 2.5(1-.35)=1.625 .12
Equity 1.625*97=157.625 157.625/170.43=.92487 8.60 7.95
Total 170.43
Weighted average cost of capital 8.07

**cost of equity =Risk free rate+ [Beta(market risk premium -risk free rate)]

                      = 2 + [1.1 (8-2)]

                      = 2+[1.1*6]

                       = 2 + 6.6

                        = 8.6%
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