Using the two questions below, calculate the WACC for IBM assuming common equity and the 10-year bond are the only two forms of capital. Further assume the relevant tax rate is 30%, the market value of common equity is $85B and the market value of debt is $50B.

1. IBM ended trading on 7/21/2015 with a stock price of $163.07, and its most recent year of dividend payments was $5.20 per share. If dividend payments are expected to grow at a constant annual rate of 8% following last years dividend of $5.20, what is the expected annual return of an investment in this stock at todays price (NOTE: this is the company cost of common equity capital)?

Required rate of return = g + Current annual dividend (1+g) divided by current price

Therefore, Required rate of return = 11.44%

With a required rate of return 11.44%, stock price (current) is calculated as

Current price = current annual dividend (1+g) divided by k-g

Where, of capital (equity)

Therefore, Current stock price = $163.26

2. Her IBM currently has one bond in the Liabilities section of its Balance Sheet. This 10-year bond with 5 years to maturity and a 6% coupon paying semi-annually, has a yield to maturity (NOTE: the cost of this form of debt capital for IBM) of 4.25%. What is the current price of the bond if par value is $1,000?

the current price of the bond is 1078.09