Finance Question - Three-Step Process for Estimating a Firm’s WACC
AmazingExpert
session-4-homework.xlsxProblem 4-4
| Toni Bennett | ||||||
| Session 4 Homework | ||||||
| Given | ||||||
| December 31, 2006 | ||||||
| Liabilities and Owner's Capital | Balance Sheet (Book Values) | Invested Capital (Market Values) | ||||
| Current liabilities | Solution Legend | |||||
| Accounts payable | $ 8,250,000 | = Value given in problem | ||||
| Notes payable | 40,000,000 | 40,000,000 | = Formula/Calculation/Analysis required | |||
| Other current liabilities` | 7,266,000 | = Qualitative analysis or Short answer required | ||||
| Total current liabilities | $ 55,516,000 | $ 40,000,000 | = Goal Seek or Solver cell | |||
| = Crystal Ball Input | ||||||
| Long-term debt (8.5% interest paid semi-annually, due in 2015) | $ 420,000,000 | $ 434,091,171 | = Crystal Ball Output | |||
| Total liabilities | $ 475,516,000 | $ 474,091,171 | ||||
| Owners' capital | ||||||
| Common stock ($1 par value per share) | $ 40,000,000 | |||||
| Paid-in-capital | 100,025,000 | |||||
| Accumulated earnings | 255,000,000 | |||||
| Total owners' capital | $ 395,025,000 | $ 900,000,000 | ||||
| Total liabilities and owners' capital | $ 870,541,000 | $ 1,374,091,171 | ||||
| Capital Market Data | ||||||
| Treasury Bond Yield | 5.42% | |||||
| Market Risk Premium | 5.00% | |||||
| Unlevered equity beta (SIC 4924) | 0.90 | |||||
| Stock price | $ 22.50 | |||||
| Market capitalization | ||||||
| Yield on debt | 8.00% | |||||
| Bond beta | 0.30 | |||||
| Short-term interest bearing debt | ||||||
| New long-term debt total | $ 434,091,171 | |||||
| Tax Rate | 40.00% | |||||
| Solution | ||||||
| Step 1: Evaluate the capital structure weights | ||||||
| Enterprise Value = Market Capitalization + Debt | ||||||
| Debt / Enterprise Value | ||||||
| Equity / Enterprise Value | ||||||
| Step 2: Estimate the costs of Financing | ||||||
| Debt (after taxes) | ||||||
| Equity | ||||||
| Levered equity beta | ||||||
| Step 3: Calculate the WACC | ||||||
| WACC | ||||||
| Capital Structure Weight | ||||||
| Source of Capital | (Proportion) | After-Tax Cost | Weighted After-Tax Cost | |||
| Debt | ||||||
| Equity | ||||||
| WACC | ||||||
Problem 5-5
| A. In order to evaluate the cost of capital for each of Anheuser-Busch Companies, Inc's business segments, the cost of equity and after-tax cost of debt must be first established. In order to do so, the capital structure for each of the business segments must be established. For the cost of equity, using CAPM, the risk free rates, betas and market risk premiums for each segments need to be identified. Below are suggestions for some of the basis that can be sued to establish these factors. Segment Risk Free Rate Beta Market Risk Premium Domestic Beer Fed 90-day T-bill Relative to the local beer market S&P 500 earnings yield International Beer UK 90-day T-bill Relative to the international beer market with focus on China and UK Global index Packaging Fed 90-day T-bill Relative to the local packaging industry S&P 500 earnings yield Entertainment Fed 90-day T-bill Relative to the local entertainment industry S&P 500 earnings yield After establishing the basis of evaluating cost of equity for each segment, the after-tax cost of debt is next. The income taxes for each of the segment must be identified, and the market prices of divisional debts will help determine yield-to-maturities. After which the cost of capital can now be evaluated. |
| B. Yes, the internal sales definitely affect the analysis because of its percentage relative to the division's total sales. For example, in identifying the beta for the Packaging Division, the fact that it is not an average player in the industry must be taken into account when 'relative to the local industry' is evaluated. |
