I need help with calculating the WACC for GE. I have an example given in my clas

Question

I need help with calculating the WACC for GE. I have an example given in my class, but it does not show the formulas I need to calculate the WACC. Below is the example with three stars (***) next to the variables I don't know how to calculate. Can someone help me figure this out?

Risk free rate 2.4% treasury.gov Beta 0.58 yahoo finance Expected market return 7.14% Morningstar Market Risk Premium 4.74% Calculated ***Cost of equity 5.15% Calculated ***Tax rate 37.50% Calculated ***Nominal cost of net debt 4.18% Wgt Avg calculated ***After ta cost of debt 2.61% Calculated Shares outstanding (millions) 289.78 Yahoo finance LMT share price $258.20 Yahoo finance ***Market Value of Equity (millions) $74,821 Calculated Net Financial Obligations $14,171 Reformulated Balance sheet ***Market valaue of firm $88,992 Calculated ***Weight of Equity 84.08% Calculated ***Weight of debt 15.92% Calculated ***WACC 4.75% Calculated

Explanation / Answer

Cost of equity = Risk free rate +beta * market risk premium

= 2.4 + 0.58*4.74 = 5.15%

After tax cost of debt = Nominal cost of debt*(1-tax rate)

= 4.18*(1 - 0.375) = 2.61

Market value of equity = Market price * number of shares outstanding

= $258.20*289.78 = $74,821

Market value of the firm = Market value of equity + Net financing obogations

= $78,421+$14,171

=$88,992

Weight of equity = $78,421 / $88,992 = 84.08%

Weight of debt = $14,171 / $88,992 = 15.92%

WACC = Cost of equity * weight of equity + after tax cost of debt * weight of debt

= 5.15*84.08% + 2.61*15.92%

= 4.75%

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