6 Project – Calculating the Weighted

Average Cost of CapitalOnce again, your team is the key financial management team for your company. The company’s CEO isnow looking to expand its operations by investing in new property, plant, and equipment. In order toeffectively evaluate the project’s effectiveness, you have been asked to determine the firm’s weightedaverage 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 informationfor the company you selected. (Be sure that your company has debt on their balance sheet. Thiswill be required in your project.)a. Enter your company’s name or ticker symbol. Your company’s information shouldappear.b. Click on the Financials tab, and select the income statement option. Three years’ worthof 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 sheetdate 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 Debti. Determine the market value of the firm’s debt issues. Be sure to review thefirm’s 10-K. Also, the website http://finra-markets.morningstar.com/BondCentermay be of assistance.ii. You will need to calculate the firm’s composite YTM on its bonds. This can beachieved 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 costof debt. If the firm’s marginal tax rate cannot be identified in its 10-K, assumethat the tax rate will be 35%.b. Cost of Equityi. Calculate the firm’s cost of equity using the capital asset pricing model (CAPM).The formula for the CAPM is ri = rf + ?i × (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. Deliverable c. Calculate the WACCi. Determine the market capitalization of the firm’s common equity and preferredequity, if any.ii. Determine the firm’s capital structure based on the market value of the firm’sequity and debt. The market value of the firm’s debt can be obtained from theMorningstar 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). 1 FIN515: Week 6 Project – Calculating the WeightedAverage Cost of CapitalPrepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps youperformed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in thepresentation to demonstrate your calculations. Be sure to discuss how the values were obtained orderived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in thecalculations you performed, and discuss your analysis about the overall validity of your results. Bothmembers of the team must be part of the narration in the presentation.Grading RubricPossiblePointsCalculation ofCost of Debt Calculation ofCost of Equity WACCCalculation 12 12 8 Form8 Criteria and Point Range0-3 4-6 Incorrect data or nodebt data provided. Questionable dataused. Some errors incalculationspresented. Data is mostlyaccurate. Correctcalculationsperformed. Accurate debt datacollected andcorrect cost of debtcalculations made. 4-6Questionable dataused. Some errors incalculationspresented. 7-9Data is mostlyaccurate. Correctcalculationsperformed. 10-12Accurate equitydata collected andcorrect cost of debtcalculations made. 3-4Two errors noted inthe calculationrelating to eithercost of debt, cost ofequity, or capitalstructure.3-4Several problemsnoted in regard towriting andpresentation skills. 5-6One error noted inthe calculationrelating to eithercost of debt, cost ofequity, or capitalstructure.5-6Writing andpresentation donewell with a fewminor errors 7-8WACC Calculationutilizes appropriatecost of debt andequity and capitalstructure to arriveat a solid result.7-8Virtually no errors inwriting orpresentation. Incorrect cost ofdebt calculations0-3Incorrect data or noequity dataprovided.Incorrect cost ofequity calculations0-2All elements of theWACC calculationare incorrect, orcalculation notperformed.0-2Poor writing andpresentation skills,or no presentationprovided. 2 7-9 10-12 FIN515: Week 6 Project – Calculating the WeightedAverage Cost of Capital 3