Apple Inc Total Assets Total liabilities Total preferred stock Total common equity Other equities
Dollar value 321 Milan Lucic Oilers Jersey ,686,000 193,437,000 0 31 Brandon Manning Oilers Jersey ,251,000 96998000
% of Assets 100% 60.3% 0% 9.7% 30%



Apple Inc Income before Tax Income Tax Expense Income after tax Average Tax Rate (%)
61,372,000 15 Sam Gagner Oilers Jersey ,685,000 45,687,000 26.25%




Yield to maturity Average tax rate After tax cost of debt
1050 26.25% 7%


$1050= $40 (1+7) +1000(1+7)10= 7
Annual dividends Current Value of Preferred Stock Cost of Preferred Stock (%)
2.8 0 2.8


5-year Treasury Bond Yield
(risk-free rate) Stock's Beta Return on the Top 500 Stocks (market return) Cost of Common Equity
2.23 1.50% 7.5% 13.48%


Cost of Equity = 2.23000000% + 1.50 * 7.5% = 13.48%


After-Tax Cost of Debt Cost of Preferred Stock Cost of Common Equity WACC
Un-weighted Cost 0 9.7% 0.9197*9.7%
Weight of Component 0 0.63% 0.0803* 60.3%
Weighted Cost of Component 0 8.6%


WACC = E (E + D) * Cost of Equity + D (E + D) * Cost of Debt * (1 - Tax Rate)
Weight of equity = E (E + D) = 128249000 (128249000+ 193 Markus Granlund Oilers Jersey ,437,000) = 0.9197
Weight of debt = D (E + D) = 193,437,000 (128249000+ 193 Mike Smith Oilers Jersey ,437,000) = 0.0803
WACC = E (E + D) * Cost of Equity + D (E + D) * Cost of Debt * (1 - Tax Rate)
= 0.9197 * 13.48% + 0.0803 * 0.603% * (1 - 26.25%)
= 12.48%


0.082+0.0039=8.6%


How would you expect the WACC to differ if you had used market values of equity rather than the book value of equity, and why?
WACC would be more accurate if market values were used as it reflects the current market value of stock. This is because book value makes use of historical data.
What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?
The Weighted Average Cost of Capital is altered by a change in capital structure. Typically Darnell Nurse Oilers Jersey , the cost of equity is higher than the cost of debt. Thus, increasing the equity usually increases WACC. The cost of equity increases as more equity is issued.


If the after-tax cost of debt is always less expensive than equity, why don't firms use more debt and less equity?
Despite the tax shield benefits associated with debt financing, most businesses prefer to use equity. The fixed nature of debt can be a disadvantage as in introduces a fixed expense. It also increases a firm risk. If a business fails to generate enough cash Adam Larsson Oilers Jersey , the fixed nature of debt can be burdensome. This idea represents the risk connected to debt financing. Other risks associated with debt financing include interest risk, Currency risk, and bankruptcy risk.
What are some of the advantages and disadvantages of raising capital by using debt?
Advantages
Retain control
Debt financing allows the company to retain control. When a firm agrees to acquire debt financing from a lending institutions, the lender has no influence in how the business manages the company.
Tax advantage
Debt financing has tax an advantage as the amount paid in interest is tax deductible. This effectively reduces the firm鈥檚 net obligation.
Easier planning
Debt financing allows the business to plan easily. The business has the information on the amount of payment required by the lending institution.
Disadvantages
Qualification requirements
A business needs to have a good credit rating in order to receive debt financing.
Discipline
A loan requires the business to make its payment on time. Thus Kris Russell Oilers Jersey , it is important to exercise restraint and employ good financial judgment when using debt capital. Overdependence on debt could result in 鈥榟igh risk.鈥? This may keep away potential investors. Collateral
Debt financing could put business assets at risk. Business is required to provide collateral to the lender.
How 鈥渇loatation costs鈥?would impact the WACC, and how could they have been incorporated into the formula?
Floatation cost is the difference between flotation cost and the cost of new equity. Thus, floatation cost affects the price of equity. Flotation cost is generally more for stock issues. However, it is often ignored when calculating the cost of capital. It could be incorporated in the formula as follows (Pratt & Grabowski Wayne Gretzky Oilers Jersey , 2008).

Reference
Nasdaq (2016). Apple Inc. Financial statement. Retrieved from: > Pratt, S. P., & Grabowski, R. J. (2008). Cost of capital. John Wiley & Sons.


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