QuestionAverage Cost of Capital
\nOnce again, your team is the key financial management team for your company. The company\ufffd\ufffd\ufffds CEO is
\nnow looking to expand its operations by investing in new property, plant, and EQUIPMENT. In order to
\neffectively evaluate the project\ufffd\ufffd\ufffds effectiveness, you have been asked to determine the firm\ufffd\ufffd\ufffds weighted
\naverage cost of capital. To determine the cost of capital, here is what you have been asked to do.
\n1. Go to Yahoo Finance (http:\/\/finance.yahoo.com) and capture the income statement information
\nfor the company you selected. (Be sure that your company has debt on their balance sheet. This
\nwill be required in your project.)
\na. Enter your company\ufffd\ufffd\ufffds name or ticker symbol. Your company\ufffd\ufffd\ufffds information should
\nappear.
\nb. Click on the Financials tab, and select the income statement option. Three years\ufffd\ufffd\ufffd worth
\nof income statements should appear. Copy and paste this data into a spreadsheet.
\nc. Repeat step b. above for the balance sheets of the company.
\nd. Click on \ufffd\ufffd\ufffdHistorical Prices.\ufffd\ufffd\ufffd Capture the closing price of the stock as of the balance sheet
\ndate for the three fiscal years used in steps b and c above.
\n2. Calculate the Weighted Average Cost of Capital (WACC) for the company:
\na. Cost of Debt
\ni. Determine the market value of the firm\ufffd\ufffd\ufffds debt issues. Be sure to review the
\nfirm\ufffd\ufffd\ufffds 10-K. Also, the website http:\/\/finra-markets.morningstar.com\/BondCenter
\nmay be of assistance.
\nii. You will need to calculate the firm\ufffd\ufffd\ufffds composite YTM on its bonds. This can be
\nachieved by calculating a weighted-average YTM for its bond issues.
\niii. After calculating the YTM for the bond issues, calculate the firm\ufffd\ufffd\ufffds after-tax cost
\nof debt. If the firm\ufffd\ufffd\ufffds marginal tax rate cannot be identified in its 10-K, assume
\nthat the tax rate will be 35%.
\nb. Cost of Equity
\ni. Calculate the firm\ufffd\ufffd\ufffds cost of equity using the capital asset pricing model (CAPM).
\nThe formula for the CAPM is ri = rf + ?i \ufffd\ufffd (RMkt – rf).
\nii. Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds.
\niii. Calculate the market rate (RMkt) by calculating the market return on the Standard
\n& Poor\ufffd\ufffd\ufffds 500 for the past 2 calendar years.
\niv. The beta for the firm can be obtained from Yahoo! Finance. Deliverable c. Calculate the WACC
\ni. Determine the market capitalization of the firm\ufffd\ufffd\ufffds common equity and preferred
\nequity, if any.
\nii. Determine the firm\ufffd\ufffd\ufffds capital structure based on the market value of the firm\ufffd\ufffd\ufffds
\nequity and debt. The market value of the firm\ufffd\ufffd\ufffds debt can be obtained from the
\nMorningstar website, listed in the Cost of Debt SECTION above.
\niii. Calculate the WACC. As you recall, the formula for WACC is rWACC = E \ufffd\ufffd (E + D) rE +
\nD \ufffd\ufffd (E + D) rD (1 – TC). 1 FIN515: Week 6 Project \ufffd\ufffd\ufffd Calculating the Weighted
\nAverage Cost of Capital
\nPrepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps you
\nperformed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in the
\npresentation to demonstrate your calculations. Be sure to discuss how the values were obtained or
\nderived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in the
\ncalculations you performed, and discuss your analysis about the overall validity of your results. Both
\nmembers of the team must be part of the narration in the presentation.
\nGrading Rubric
\nPossible
\nPoints
\nCalculation of
\nCost of Debt Calculation of
\nCost of Equity WACC
\nCalculation 12 12 8 Form
\n8 Criteria and Point Range
\n0-3 4-6 Incorrect data or no
\ndebt data provided. Questionable data
\nused. Some errors in
\ncalculations
\npresented. Data is mostly
\naccurate. Correct
\ncalculations
\nperformed. Accurate debt data
\ncollected and
\ncorrect cost of debt
\ncalculations made. 4-6
\nQuestionable data
\nused. Some errors in
\ncalculations
\npresented. 7-9
\nData is mostly
\naccurate. Correct
\ncalculations
\nperformed. 10-12
\nAccurate equity
\ndata collected and
\ncorrect cost of debt
\ncalculations made. 3-4
\nTwo errors noted in
\nthe calculation
\nrelating to either
\ncost of debt, cost of
\nequity, or capital
\nstructure.
\n3-4
\nSeveral problems
\nnoted in regard to
\nwriting and
\npresentation skills. 5-6
\nOne error noted in
\nthe calculation
\nrelating to either
\ncost of debt, cost of
\nequity, or capital
\nstructure.
\n5-6
\nWriting and
\npresentation done
\nwell with a few
\nminor errors 7-8
\nWACC Calculation
\nutilizes appropriate
\ncost of debt and
\nequity and capital
\nstructure to arrive
\nat a solid result.
\n7-8
\nVirtually no errors in
\nwriting or
\npresentation. Incorrect cost of
\ndebt calculations
\n0-3
\nIncorrect data or no
\nequity data
\nprovided.
\nIncorrect cost of
\nequity calculations
\n0-2
\nAll elements of the
\nWACC calculation
\nare incorrect, or
\ncalculation not
\nperformed.
\n0-2
\nPoor writing and
\npresentation skills,
\nor no presentation
\nprovided. 2 7-9 10-12 FIN515: Week 6 Project \ufffd\ufffd\ufffd Calculating the Weighted
\nAverage Cost of Capital 3<\/p>\n","protected":false},"excerpt":{"rendered":"
QuestionAverage Cost of Capital Once again, your team is the key financial management team for your company. The company\ufffd\ufffd\ufffds CEO is now looking to expand its operations by investing in new property, plant, and EQUIPMENT. In order to effectively evaluate Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-5492","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/5492","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=5492"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/5492\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=5492"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=5492"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=5492"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}