Example: Cost of Capital For Amgen: $5.11 Billion
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no nameExample: Cost of Capital For Amgen: $5.11 Billion
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no nameExample: Cost of Capital for Amgen
Estimate the WACC for Amgen based on the following
assumptions:
– The cost of equity was estimated previously to be 8.06%
– The cost of debt is 5.0% (based on the firm’s rating and comparable bonds)
– Amgen’s book value of debt equals $5.11 billion
– Amgen’s market value of equity equals $98.29 billion (bk = $19.705b)
– The marginal tax rate is 40%
⎛ 98.29 ⎞ ⎛ 5.11 ⎞
WACC = ⎜ ⎟8.06% + ⎜ ⎟5.0%(1 − .4)
⎝ 98.29 + 5.11 ⎠ ⎝ 98.29 + 5.11 ⎠
= .9506(8.06%) + .0494(3%) = 7.809%
Dealing with Hybrids and Preferred Stock
When dealing with hybrids such as convertible bonds, break
the security down into debt and equity and allocate the
amounts accordingly.
– Example, if a firm has $ 125 million in convertible debt, separate
the $125 million into straight debt and conversion option
components. The conversion option is equity.
When dealing with preferred stock, it is best to consider it as a
separate component.
– The cost of preferred stock is the preferred dividend yield.
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Example: Convertible Debt at Amgen
As of 12/31/2004, Amgen’s debt included a 30-year zero-coupon
convertible bond issued in March of 2002. This bond has a face value of
$3.937 billion and a yield of 1.125%.
Estimate the market value of the debt and equity components for this
convertible bond (assume the book value of debt equals the market value).
3.937
Straight Debt Component = = $1.004b
(1.05)28
Equity Component = 3.937b − 1.004b = $2.933b
The corrected WACC formula for Amgen then equals:
⎛ 101.223 ⎞ ⎛ 2.177 ⎞
WACC = ⎜ ⎟8.06% + ⎜ ⎟5.0%(1 − .4)
⎝ 101.223 + 2.177 ⎠ ⎝ 101.223 + 2.177 ⎠
= (.9789)(8.06%) + (.0211)(3%) = 7.953%
