Week 5 Financial Exercises
Week Five Financial Exercises
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.
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