3 pages

FIN 319 – Case #1

Company Overview and Cost of Capital for Precision Castparts Corporation

For each of the three cases this term, we will be referencing Precision Castparts. We will use Precision

Castparts to practice applying a variety of financial frameworks to include: cost of capital, capital

structure, capital budgeting, payout policy and valuation.

For Case #1, you are in the role of a consultant and have been hired to estimate the current weighted

average cost of capital (WACC) for Precision Castparts. Your recommendation should include a

definition of WACC, why it is relevant to the firm, and a specific WACC Precision Castparts should use

that is supported by your calculations. Please also include a recommendation of how the WACC should

be used within the company for decision making. To help provide context, your report will also include

an overview of the company.

The company overview should include: a summary of Precision Castparts’s major markets served,

description of the business model and measures of the scale (size) of operations. Please use your own

words in the company overview (do not copy from other sources).

In estimating the WACC, be sure to describe the sources of capital the firm uses to finance operations.

Include specific assumptions that support the calculations for: cost of debt, cost of equity, market

values of debt and equity. To be consistent, please refer to Precision Castparts’s 2014 10-K filing for its

financial statements and current capital structure.

The length of case should be 3-5 pages of text plus exhibits in an appendix.

To estimate the weighted average cost of capital you will need to:

• Utilize the Capital Asset Pricing Model to estimate the cost of equity: o Risk Free Rate: The proxy for the Risk Free Rate should be a US Treasury note or bond with a

duration of similar length as the asset being valued o Beta: To estimate beta you can utilize published betas which can be found at a variety of finance

sites to include: Morningstar, Yahoo! Finance, Google Finance and databases available at the PSU Library and / or calculate your own estimate of beta.

o Market Risk Premium: Decide on an appropriate approach to estimate the Market Risk Premium and incorporate the necessary assumptions.

• Utilize the after tax yield to maturity of debt for the company to estimate the cost of debt: o A company will often have multiple bonds outstanding at any one time. If so, calculate a weighted

average YTM for the bonds outstanding. o A list of bonds outstanding can be found in the company’s 10Q or 10K o The current pricing and YTM on publically traded bonds can be found at:

http://finra-markets.morningstar.com/BondCenter/Default.jsp

• Financing weights. Calculate the market value of debt and equity. The value of debt plus equity is equal to the overall value of the firm. Based on the values of debt and equity you can calculate the weights of each type financing. For this case, please use the market value weights to estimate the weighted average cost of capital.

o The market value of equity is also known as market capitalization and can be determined by finding the current stock price per share and multiplying it by the number of shares outstanding.

o The market value of debt can be calculated from the bond site listed above. o Market prices of bonds are often quoted as a percentage of par value. For example, if a bonds

current price is 110, it is currently trading at 110% of par. o The book values of debt and equity can be obtained from the company’s balance sheet.

I am interested in the frameworks you use to solve the problem/s, assumptions made, analysis,

recommendation and ability to clear communicate. Grading will consider:

• Critical Thinking: Have you formulated meaningful questions (what are the critical issues or

problem), synthesized information and financial data, considered alternatives or improvements,

proposed position / solutions.

• Analysis: Have you chosen the appropriate analytical framework/s to utilize and appropriately

applied them. Assess quality of supporting evidence, key assumptions are identified and a clear

recommendation supported by the analysis.

• Communication: The paper must be written clearly with a central message and logical

organization. Ideas and recommendations are well supported. The case should contain an

executive summary, framing of the problem, analysis, consideration of alternative solutions and

recommendation. Please ensure correct spelling, grammar and clear formatting of financial

exhibits. Use of tables and charts are often an efficient means to communicate financial

information.

Items Considered for Grading

Absent Satisfactory Excellent

Company Overview 0 1 2 3 4 Comment

Product Lines and Markets Served

Business Model

Scale of Operations

WACC

Overall framework

Market value of Debt

Market value of Equity

Cost of Debt

Cost of Equity

Communication

Overall Presentation

Executive Summary

Organization & Clarity

Supporting evidence

Synthesis & Recommedation

Grammer, spelling

Use of Exhibits, Charts