Lockheed Martin – The Cost of Equity
Tyrone Harris
TUI University

Introduction I will discuss the cost of equity of Lock Heed Martin and its comparison with other companies within the industry. Discussion Capital Asset Pricing Model (CAPM) The assumptions that have been taken to calculate the cost of equity of the Lockheed Martin is: The Capital Asset Pricing Model is selected to compute the cost of capital. The risk free rate is assumed as the yield on the thirty years US treasury bonds. The S&P 500 is used as a proxy for the expected return for the market. Using the CAPM formulae:

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E (Ri) = Rf + βi (E(Rm) – Rf) Where, E (ri) is the expected rate of return of capital on the asset i. βim is the Beta (amount of risk with respect to the Market Portfolio) E (rm - rf) is the excess return of the market portfolio. (rm) Performance of the market. (rf) Return on risk free asset. RF = 3% (30 Year U.S. Treasury Bond Yield Forecast, 2012). RM =5.93 % (S&P 500, 2012). Market Risk Premium: [RM - RF] = 2.93 % Beta of Lockheed: 0.62 = 3+ (2.93)*0.62 = 4.8166 % Ans Next, I calculated the Weighted Average Cost of Capital (WACC) of the Lockheed Martin. The Cost of Debt of the firm is approximately around 7 % and the Cost of Equity as calculated above is 4.8166%. The proportion of the debt/capital ratio of the firm is 60 to 40 percent. The Tax rate for Lockheed Martin is 26 %. Accordingly the WACC = (Return on Equity x Equity Proporion) + (Cost of Debt x Debt Proporion x (1-Tax Rate)). Therefore, the WACC of Lockheed Martin is (4.8116% x 40%) + (7% x 60% x 74%). The final WACC figure for Lockheed Martin is therefore rounded off to 6 %. The investor is expecting a cost of capital of 6% if