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company’s weighted average cost of capital (WACC).
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This is an internet research exercise. Be sure to answer all questions. The end goal is to calculate a chosen company’s weighted average cost of capital (WACC).
Begin by going to http://www.finra.org/investors (Links to an external site.)Links to an external site.. In the vertical menu bar on the left, hover your mouse over “Tools and Calculators” and click on “FINRA Market Data”. Then, click on “Company Information” in the left margin.
Now, enter a stock ticker symbol for any company of your choice in the “Get a Quote” box and click Go. Please pick a company not already chosen by a classmate. Information on your chosen company will appear. Just above the name of your company, you will see a horizontal menu bar – click on ‘Bond Issues’. At this point, you should see about 5 line items of bond issue data for your company. In most cases, you have to click “more bond information” at the bottom of the table to see all of the data. After clicking “more bond information” (if applicable), then click on the “Maturity” column TWICE to sort the data by bond maturity date with the longest dated maturity listed first. If your chosen company has no bonds listed, choose another company!
Please make a post with answers to the following questions:
Not all bonds listed will have a “Yield” in the right under “Last Sale’. Identify the first bond listed with a yield provided. What is that yield? What is the maturity of that bond? (It should be a bond with a date far into the future relative to the bonds listed below, assuming you correctly sorted by maturity date with the longest-dated bond listed first as directed above).
Now, go back to the main menu for your company (where you chose Bond Issues). Now, go to the Profile Tab. Just to the right of the graph you will see an item called Market Cap – this is the total value of your company’s equity (shares outstanding x share price). How much is the total value of your company’s stock as measured by Market Cap?
What is your firm’s beta? The beta can be found just to the right of the market cap.
Now, choose the Financials tab within the Profile tab. Then, click on the balance sheet item. How much total debt does your company have? (Use the total debt value for the most recent year). Note: This total debt amount is the book (par) value of total debt. You should note from this week’s material that we should be using the market value of total debt to compute WACC, but that data is generally proprietary and hard to get. And, because the book value of debt is often not too different from the market value of debt, it is often the case that the book value of debt is simply used as a proxy for its market value.
Now, add the total debt (from #4) and the market cap (from #2) to get an estimate of the total value of your’s firm capital. Use this total value of capital and the total debt value and the Market Cap value to get your weights to be used in the WACC calculation.What are those weights?
Now, click on Bonds in the left margin. Under the Treasury Yield tab, what is the current yield on the 3-month Treasury bill (the estimate of the risk-free rate)?
Using a market risk premium of 8.5%, the risk-free rate from #6, and the beta from #3, estimate your firm’s cost of equity using the CAPM formula. What is your CAPM estimate of the cost of equity? Now, take the YTM you found in #1 on your company’s long-term bonds and add 6.1% (the historic return difference between common stock and long-term bonds on large companies as shown in the lecture notes). This sum leads to another estimate of the cost of equity called the bond yield plus risk premium (BYPRP) estimate. What is your BYPRP estimate of the cost of equity? To arrive at a final cost of equity for use in your WACC calculation below, use the higher of the CAPM or BYPRP estimates.
Now, put your answers all together, and calculate and report the company’s weighted average cost of capital (WACC). Just a reminder, the formula for calculating WACC is provided below, The weights (wd, we) are provided in your answer to #5. The cost of debt (rd,) is provided in your answer to #1. Use the current 21% as the corporate tax rate (τc). The cost of equity is provided in your answer to #7.
rwacc = wdrd(1-τc) + were
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