Your task is to determine the WACC for a company (must be publically traded) using what you know about WACC as well as data you can find through research. Your deliverable is to be 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.
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-rfis the Market Risk Premium. For this project, you may assume that the Market Risk Premium is 4%, unless you can develop a better number.
rf is the risk-free rate. The YTM on 10-year U.S. Treasury securities is a good approximation.
You may assume a corporate tax rate of 40%.
One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. 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 http://finra-markets.morningstar.com/BondCenter. 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.
Write a two or three page report that contains the following elements:
Your calculated WACC
How data were 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?
When working with Project 2, students may select any publicly traded company. This e-mail is simply to ensure that each student is fully aware of the assignment requirements – as they are mandatory for all sections of FI515 and not subject to my discretion.
Overall, you are required to identify the relevant variables and calculate then evaluate the WACC for a company of your choice.
To work through the WACC formula, you must first calculate the required rate of return for your company’s stock using the CAPM. As noted in the project instructions, you can use 4% as the assumed market risk premium and the YTM on the 10 year U.S. treasury as the risk-free rate. You may also assume a tax rate of 40%. You will need to determine the total amount of equity as well as the beta score for the company you select. Please see the Project 2 instructions for tips in this area.
As noted in the grading rubric for this assignment, correctly identifying the WACC inputs and working through the detailed calculations is 30 points of the 50 point total.
Do not simply pull a WACC calculation from an internet-based site as the failure to provide the specific information requested in the rubric is a mandatory deduction. If you do not show the individual variables, their sources and the detailed calculations, you cannot pass this assignment.
In addition, providing the specific locations (e.g. internet links) for the information you used in the WACC is required. Please do not forget to provide this information as it is required and would lead to a 10 point mandatory deduction.
Finally, write a brief paragraph detailing the assumptions and limitations of your answer. Again, see the detailed project instructions for specific instructions and be sure to let me know in the weekly question and answer thread if you have any questions.