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:
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 ri = rf + βi × (RMkt - rf).
ii. Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds.
iii. Calculate the market rate (RMkt) 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 rWACC = E ÷ (E + D) rE + D ÷ (E + D) rD (1 - TC).
Prepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps you performed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in the presentation to demonstrate your calculations. Be sure to discuss how the values were obtained or derived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in the calculations you performed, and discuss your analysis about the overall validity of your results. Both members of the team must be part of the narration in the presentation.