The Company’s Capital Structure:
A look at the company’s balance sheet shows that the company’s capital is made up of common stock, and long term debt. These are two types of investments and lending to the company and since both these pay return to the fund providers, they will be included in the calculation for the weighted average cost of capital or WACC.
Interest on Debt:
The total value of company’s long term debt is around $28322. This bring the share of debt in the total funding of the company to around 64%. The interest payment made against this debt in the year 2014 equaled $1126. This brings the before tax cost of debt to around 3.975%. The after tax cost of debt is equal to 3.976 (1-0.36.5) = 2.524%.
Cost of Owner’s Equity:
The weightage of common equity in the total funding of the company is around 36%. The cost of obtaining the shareholder funds is the dividend. In 2013, the company announced a cash dividend of $1.65 per share. This comes to around 6.17%.
Calculation of WACC:
The weightage of debt is around 64% and it’s after tax cost is 2.524% and weightage for common stock is around 34% and its cost is around 6.17%. This information can be used to calculate the Weighted Average Cost of Capital for Target.
Total Cost of Funding or WACC = 1.61+2.22
=3.83%
The WACC or Weightage Average Cost of Capital for the company comes around to 3.83% and it signifies that the firm can borrow new funds at this rate or at a similar rate.
References
Corporate.target.com,. (2014). Retrieved 5 December 2014, from https://corporate.target.com/annual-reports/pdf-viewer-2013?cover=6725&parts=6727-6728
Van Horne, J. (2002). Financial management and policy. Upper Saddle River, N.J.: Prentice Hall.
