SLP- LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY

WACC Computation

Student’s Name

Institutional Affiliation

Toyota Motors

Toyota Motors	Rating
Standard & Poor (S&P)	AA-
Rating and Investment Information, Inc.	AA+
Moody’s	Aa3

Toyota’s credit rating is very high as rated by the above three international agencies. Part of the reason why it is high is because of the finance subsidiary that the company runs. This subsidiary helps the company to instil confidence in lenders as they trust in the great success that this subsidiary has in the financial market specifically involving credit.

· 30-yr bond yield is 4.52%

Therefore, the cost of debt, RD is 4.52%.

· 3-month treasury bill yield = 1.38%

· This will be the risk-free rate

Cost of Equity = risk-free rate + Beta * (Equity Premium).

= 1.38% + 0.67 * 6%

= .0138 + .67 * .06

RE, = 0.7438

D/V = $280,313,000/$437,495,000 = 0.6407

E/V= $157,182,000/$437,495,000 = 0.3593

WACC = (E/V) * RE +(D/V) * RD *(1-.35)

Corporate tax assumed to be 35%

= 0.3593* 0.7438 + 0.6407 *.0452*(1-.35)

= 0.3593* 0.7438 + 0.6407 *0.0452* 0.65

= 0.0266754928492

= 2.7%

The WACC is close to the industry WACC of 4.16%