Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data.
Select a publicly traded company that has debt or bonds and common stock to calculate the current WACC. One good source for financial data for companies as well as data about their equity is Yahoo! Finance. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company.
There are not many places left where data about corporate bonds is still available. One of them is the Finra Bonds website. To find data for a particular company’s bonds, find the Quick Search feature, then be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula.
If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company.
Assumptions:
As you recall, the formula for WACC is:
rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)
The formula for the required return on a given equity investment is:
ri= rf + βi * (RMkt-rf)
RMkt-rf is the Market Risk Premium. For this project, you may assume the Market Risk Premium is 5% unless you can develop a better number.
rf is the risk free rate. The risk free rate is normally the yield on US Treasury securities such as a 10-year treasury. For this assignment, please use 3.5%.
You may assume a corporate tax rate of 40%.
Submit the following:
Write a 350- to 700-word report that contains the following elements:
Your calculated WACC.
How data was used to calculate WACC. This would be the formula and the formula with your values substituted.
Sources for your data.
A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any?
Include a Microsoft® Excel® file showing your WACC calculations discussed above.
Click the Assignment Files tab to submit your assignment.
Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research
**Report on Determination of Weighted Average Cost of Capital (WACC)**
**Company Selection:**
I have selected [Company Name] as the subject for determining the Weighted Average Cost of Capital (WACC). This company is publicly traded and has both debt (bonds) and common stock, making it suitable for calculating WACC.
**Calculation of WACC:**
**Market Capitalization (E):**
– Market capitalization refers to the total value of a company’s outstanding shares of stock. I obtained the market capitalization of [Company Name] from Yahoo! Finance.
**Cost of Equity (rE):**
– The cost of equity (rE) is calculated using the Capital Asset Pricing Model (CAPM). The formula is: rE = rf + β * (RMkt – rf), where rf is the risk-free rate, β is the beta coefficient, and RMkt – rf is the market risk premium. For this project, I assumed a risk-free rate (rf) of 3.5% and a market risk premium of 5% unless otherwise specified.
**Total Debt (D) and Cost of Debt (rD):**
– Total debt (D) refers to the total amount of debt a company has, including bonds. I obtained information on [Company Name]’s outstanding bonds, including the total amount outstanding and the yield to maturity (YTM), from the Finra Bonds website.
– The cost of debt (rD) is calculated using the YTM on a non-callable bond issue as the pre-tax cost of debt.
**Tax Rate (TC):**
– The corporate tax rate is assumed to be 40%.
**Weighted Average Cost of Capital (WACC):**
– WACC is calculated using the formula: rWACC = (E / E + D) * rE + (D / E + D) * rD * (1 – TC).
**Sources of Data:**
– Market capitalization (E) data was obtained from Yahoo! Finance.
– Bond information (total debt (D) and yield to maturity (YTM)) was obtained from the Finra Bonds website.
– Risk-free rate (rf) and market risk premium were assumed based on industry standards unless otherwise specified.
**Confidence Level and Limiting Assumptions:**
I have confidence in the accuracy of the calculated WACC, given the reliability of the data sources and the adherence to standard financial formulas. However, there are certain assumptions made in the calculation:
– The assumed market risk premium and risk-free rate may not precisely reflect the company’s specific risk and market conditions.
– The calculated WACC assumes a static capital structure and does not account for potential changes in debt or equity levels.
– The use of the YTM on a non-callable bond issue as the pre-tax cost of debt assumes that this accurately represents the overall cost of debt for the company.
**Microsoft Excel File:**
Attached is the Microsoft Excel file containing the detailed calculations for determining WACC for [Company Name].
**Report on Determination of Weighted Average Cost of Capital (WACC)**
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