2. Calculate the WACC in USD for Walgreens/Boot if they issue 150MM [AUD] in deb
ID: 2799060 • Letter: 2
Question
2. Calculate the WACC in USD for Walgreens/Boot if they issue 150MM [AUD] in debt and 200 MM EUR] in equity. The bonds sold for 1,050 AUDI, paying a coupon of 6.7% with a face value of 1,000 [AUD] and a 7 year time to maturity. Consider that the expectations are that when the bonds are issued, the AUD will be at 0.689 [USD/AUD], but will be 0.8122 USD/AUD] at the end of year 3. Use a risk free rate of 0.02% and consider the equity to be issued in the German market. Covariance matrix rtdaxdrtnikkdrtausd rtsp500 rtwalg rtdaxd0.0051 rtnikkd0.0018 0.0035 rtausd 0.0030 0.0022 0.0036 rtsp500.00250.00140.00180.0018 rtwalg 0.0002 0.0000 0.0002 0.0001 0.0056 Averages and standard deviations Variable Mean Std. rtdaxd rtnikkd rtausd rtsp5009.800 0.0434 fraction rtwalg eur yen Explanation German stock index average return Japanese stock index average return Australian stock index average return U.S. stock index average return Walgreens average returns units 0.300 0.0719 fraction 0.360 0.0592 fraction 2.7000.0604 fraction 1.2300.0772 fraction 1.1550.1979USD/EURAverage value for Euro 0.008 0.0007 USD/JPY Average value for Yen 0.6890.1231USD/AUDAverage value for Australian DollarExplanation / Answer
Using the TI Calculator , Put FV=1000, PV=-1050, ,PMT= 67, N=7 ( pmt is the coupon rate 6.7 % of 1000)
calculate the bond cost rate which will be 5.81%
This is the cost of debt.
For the cost of equity first you have to calculate the beta . Beta is used in CAPM formula below
Beta = Cov( returns of market , returns of stock)/ Variance of Market.
= 0.0002/(0.0719)2
= 0.03921
Using the Capm formula we can calculate the cost of equity
Cost of Equity= Rf+ Beta( Rm- Rf)
=0.02 + 0.039216( 0.300- 0.02)
=0.03098 which is 3.09 %
Converting AUD to USD for debt borrowing at the rate of 0.689 at the time of issuance. 150 mm AUD will be equivalent to 103.35 USD MM.
For Equity capital :
To calculate Eur/Usd we have rate of 1.155 usd/ eur so 200mm will be equal to 231 usd
so the capital structure is 103.55 + 231 = 334.35
Debt is 30 % and equity is 70 %
wacc= 0.3(5.81) + 0.7( 3.09)
= 1.79 + 2.16
= 3.95 %
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