Students will estimate the weighted average cost of capital (WACC) based on the target capital structure weights.
Task Description and Instructions
Click here for Case Study #3: How to Estimate the WACC for a Company.
This case study requires you to do some research (company selection, information collection, calculation, etc.). The mini lecture in Chapter 9 provides guidance on this assignment.
Case Study #3
| Case Study | |||||||
| You want to calculate the WACC for a public company (your choice). Complete the following steps to construct a spreadsheet that can be updated. | |||||||
| a. | State the company that you chose. Find out the company's ticker symbol, create hyperlinks to the web pages that you will need to find all of the information necessary to calculate the cost of equity. Use a market risk premium of seven percent when using CAPM. | ||||||
| Ticker symbol: | |||||||
| Stock quote link | |||||||
| Stock price: | $ | ||||||
| Dividend: | $ | ||||||
| Key statistics link | |||||||
| Beta: | |||||||
| Shares outstanding: | |||||||
| Bond center link: | |||||||
| Risk-free rate: | |||||||
| Market risk premium: | 7.00% | ||||||
| Market value of equity: | |||||||
| Cost of equity | |||||||
| CAPM: | |||||||
| b. | Create hyperlinks to the FINRA bond quote website and the SEC EDGAR database and find the information for the company's bonds. Create a table that calculates the cost of debt for the company. Assume the tax rate is 35 percent. | ||||||
| (Assume the target capital structure equals to the market value weight) | |||||||
| Maturity | YTM | Quoted Price | Book Value | Market Value | Market Value Weight | Weighted cost of debt | |
| 0.000% | |||||||
| 0.000% | |||||||
| 0.000% | |||||||
| 0.000% | |||||||
| 0.000% | |||||||
| 0.000% | |||||||
| 0.000% | |||||||
| Total market value = | $ – | Cost of debt = | 0.000% | ||||
| Tax rate: | 35% | ||||||
| Aftertax cost of debt: | |||||||
| Cost of equity: | |||||||
| Market value of equity: | $ | ||||||
| Aftertax cost of debt: | |||||||
| Market value of debt: | $ | ||||||
| c. | Finally, calculate the market value weights for debt and equity. What is the WACC for the company? | ||||||
| Weight of debt: | |||||||
| Weight of equity: | |||||||
| WACC: |