WACC project
Starasr
Brady_WACC_Example2.docxEstimating the WACC of ABC
First, does my firm have equity and debt in its capital structure before proceeding?
a. Go to https://finance.yahoo.com/ and type in the ticker symbol of your firm and click search.
b. Click on “Financials”
· BTW, note that from this screen, you can also get our estimate of “E”, the market value of equity, from “Market Cap” and the Beta of the firm, which will be used to estimate Ke. More on that later.
c. Click on Balance Sheet.
d. Notice below that ABC has long-term debt and common equity (i.e., common stock and retianed earnings), so this firm is good for the project!
Second, estimate the cost of debt, Kd
a. I googled “what is the yield to maturity on Amerisource Bergen’s corporation’s long term debt”. I did not find anything.
a. Then I googled: “Amerisource Bergen bonds yield to maturity” and found this link:
Reading the info in this link, I found that yield to maturity is on this specific bond is 4.31% (remember, the coupon rate is when the bond was first issued and does not reflect current borrowing costs)
One issue is that this bond matures in 7 years. Thus, it is not as long-term as I would like. So I decide to add an extra 1% percentage point premium as a guess as what the the yield on say a 20-year ABC bond would be.
Thus, my first estimate of Kd is 4.31% + 1% = 5.31%.
b. Also in the link above, I saw that the Moody’s bond rating in 2018 was Baa2.
From the Corporate Spreads table in the M5_Project_2_Instructions (reproduced below), this is associated with a spread of BB2 Industrial. Looking across at the 20 year column, the number 380 means 380 basis points, or 3.8 percentage points.
Now remember this is a spread, an additional risk premium above the comparable U.S. treasury bond. In other words, add this 3.8% to the yield on a 20-year U.S. treasury bond to get an estimated of Kd using the risk premium method.
Kd = Rf + 3.8%
But how do we find Rf? As stated in the instructions, go to Yahoo finance and type in ^TYX in the stock search window.
· ^ is generated by pressing the shift and 6 key simultaneously on your keyboard.
This 2.94 means 2.94%. thus, our estimate of Kd using this method is 2.94% + 3.8% = 6.74%
I now have two solid estimates of Kd using the preferred methods, so I do not have to try to find competitors yields, etc.
My first estimate for Kd is 5.31%. My second is 6.74%. My intution tells me that the first method is too low. I decide to choose something closer to the second estimate, and choose 6.15%
Kd for my WACC formula will be .0615
Third, estimate the cost of equity (Ke)
