Proeject number three week 5 FIN 515 6 slides power point

FIN515: Week 6 Project

–

Calculating the Weighted Average Cost of

Capital

1

Once again, your team is the key financial management team for your company.

The

company’s

CEO

is

now

looking

to

expand

its

operations

by

investing

in

new

property,

plant,

and

equipment.

In

order

to

effectively

evaluate

the

project’s

effectiveness,

you

have

been

asked

to

determine

the

firm’s

weighted

average

cost

of

capital.

To

determine

the

cost

o

f

capital,

here

is

what

you

have

been

asked

to

do.

1.

Go to Yahoo Finance (

http://finance.yahoo.com

) and capture the income statement information

for the company you selected.

(Be sure that your company has debt on th

eir balance sheet. This

will be required in your project.)

a.

Enter your company’s name or ticker symbol. Your company’s information should

appear.

b.

Click on the

Financials

tab, and select the income statement option. Three years’ worth

of income statements sh

ould appear. Copy and paste this data into a spreadsheet.

c.

Repeat step b. above for the balance sheets of the company.

d.

Click on “Historical Prices.” Capture the closing price of the stock as of the balance sheet

date for the three fiscal years used in steps

b and c above.

2.

Calculate the Weighted Average Cost of Capital (WACC) for the company:

a.

Cost of Debt

i.

Determine

the

market

value

of

the

firm’s

debt

issues.

Be

sure

to

review

the

firm’s

10

-

K.

Also,

the

website

http://finra

-

markets.morningstar.com/BondCenter

may be of assistance.

ii.

You

will

need

to

calculate

the

firm’s

composite

YTM

on

its

bonds.

This

can

be

achieved

by

calculating

a

weighted

-

average

YTM

for

its

bond

issues.

iii.

After

calculating

the

YT

M

for

the

bond

issues,

calculate

the

firm’s

after

-

tax

cost

of

debt.

If

the

firm’s

marginal

tax

rate

cannot

be

identified

in

its

10

-

K,

assume

that

the

tax

rate

will

be

35%.

b.

Cost

of

Equity

i.

Calculate

the

firm’s

cost

of

equity

using

the

capital

asset

pricing

model

(CAPM).

The

formula

for

the

CAPM

is

r

i

=

r

f

+ β

i

Χ (

R

Mkt

-

r

f

).

ii.

Assume

the

risk

-

free

rate

(

r

f

)

is

the

current

rate

of

10

-

year

U.S.

Treasury

Bonds.

iii.

Calculate

the

market

rate

(

R

Mkt

)

by

calculating

the

market

return

on

the

Standard

&

Poor’s

500

for

the

past

2

calendar

years.

iv.

The

beta

for

the

firm

can

be

obtained

from

Yahoo!

Finance.

c.

Calculate

the

WACC

i.

Determine

the

market

capitalization

of

the

firm’s

common

equity

and

preferred

equity

,

if

any.

ii.

D

etermine

the

firm’s

capital

structure

based

on

the

market

value

of

the

firm’s

equity

and

debt.

The

market

value

of

the

firm’s

debt

can

be

obtained

from

the

Morningstar

website,

listed

in

the

Cost

of

Debt

section

above.

iii.

Calculate

the

WACC.

As you

recall, the formula for WACC is

r

WACC

=

E

χ (

E

+

D

)

r

E

+

D

÷

(

E

+

D

)

r

D

(1

-

T

C

).

FIN515: Week 6 Project – Calculating the Weighted Average Cost of

Capital

1

Once again, your team is the key financial management team for your company. The company’s CEO is

now looking to expand its operations by investing in new property, plant, and equipment. In order to

effectively evaluate the project’s effectiveness, you have been asked to determine the firm’s weighted

average cost of capital. To determine the cost of capital, here is what you have been asked to do.

1. Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information

for the company you selected. (Be sure that your company has debt on their balance sheet. This

will be required in your project.)

a. Enter your company’s name or ticker symbol. Your company’s information should

appear.

b. Click on the Financials tab, and select the income statement option. Three years’ worth

of income statements should appear. Copy and paste this data into a spreadsheet.

c. Repeat step b. above for the balance sheets of the company.

d. Click on “Historical Prices.” Capture the closing price of the stock as of the balance sheet

date for the three fiscal years used in steps b and c above.

2. Calculate the Weighted Average Cost of Capital (WACC) for the company:

a. Cost of Debt

i. Determine the market value of the firm’s debt issues. Be sure to review the

firm’s 10-K. Also, the website http://finra-

markets.morningstar.com/BondCenter may be of assistance.

ii. You will need to calculate the firm’s composite YTM on its bonds. This can be

achieved by calculating a weighted-average YTM for its bond issues.

iii. After calculating the YTM for the bond issues, calculate the firm’s after-tax cost

of debt. If the firm’s marginal tax rate cannot be identified in its 10-K, assume

that the tax rate will be 35%.

b. Cost of Equity

i. Calculate the firm’s cost of equity using the capital asset pricing model (CAPM).

The formula for the CAPM is r

i

= r

f

+ β

i

× (R

Mkt

- r

f

).

ii. Assume the risk-free rate (r

f

) is the current rate of 10-year U.S. Treasury Bonds.

iii. Calculate the market rate (R

Mkt

) by calculating the market return on the

Standard & Poor’s 500 for the past 2 calendar years.

iv. The beta for the firm can be obtained from Yahoo! Finance.

c. Calculate the WACC

i. Determine the market capitalization of the firm’s common equity and preferred

equity, if any.

ii. Determine the firm’s capital structure based on the market value of the firm’s

equity and debt. The market value of the firm’s debt can be obtained from the

Morningstar website, listed in the Cost of Debt section above.

iii. Calculate the WACC. As you recall, the formula for WACC is r

WACC

= E ÷ (E + D) r

E

+ D ÷ (E + D) r

D

(1 - T

C

).