Writers Den

Once
again, your team is the key financial management team for your company.The
company’s CEO is now looking to expand its operations by investing in new
property, plant, and equipment. In order to effectively evaluate the project’s
effectiveness, you have been asked to determine the firm’s weighted average
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 information for the company you
selected. (Be sure that your company has debt on their balance sheet. This will
be required in your project.)

a. Enter your company’s name or ticker symbol. Your company’s information
should appear.

b. Click on the Financials tab, and select the income statement option.
Three years’ worth of 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 sheet date 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 Debt

i. Determine the market value of the firm’s debt issues.
Be sure to review the firm’s 10-K. Also, the websitehttp://finra-markets.morningstar.com/BondCentermay be of assistance.

ii. You will need to calculate the firm’s composite YTM on
its bonds. This can be achieved 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 cost of debt.If the firm’s marginal tax rate
cannot be identified in its 10-K, assume that the tax rate will be 35%.

b. Cost of Equity

i. Calculate the firm’s cost of equity using the capital
asset pricing model (CAPM). The formula for the CAPM isr_i= r_f+ ?_i× (R_Mkt– r_f).

ii. Assume the risk-free rate (r_f) is the current rate of 10-year U.S. Treasury Bonds.

iii. Calculate the market rate (R_Mkt) 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.

c. Calculate the WACC

i. Determine the market capitalization of the firm’s
common equity and preferred equity, if any.

ii. Determine the firm’s capital structure based on the
market value of the firm’s equity and debt. The market value of the firm’s debt
can be obtained from the Morningstar website, listed in the Cost of Debt
section above.

iii. Calculate the WACC.As you recall, the formula for WACC isr_WACC=E÷ (E+D)r_E+D÷ (E+D)r_D(1-T_C).

Deliverable

Prepare
a narrated PowerPoint presentation using VoiceThread or WebEx that shows the
steps you performed to calculate the WACC for your firm. Feel free to embed
your Excel spreadsheets in the presentation to demonstrate your calculations.
Be sure to discuss how the values were obtained or derived to arrive at your
WACC result. Finally, be sure to discuss any strengths or limitations in the
calculations you performed, and discuss your analysis about the overall
validity of your results. Both members of the team must be part of the
narration in the presentation.

Grading
Rubric

	Possible Points	Criteria and Point Range
Calculation of Cost of Debt	12	0-3	4-6	7-9	10-12
Incorrect data or no debt data provided. Incorrect cost of debt calculations	Questionable data used. Some errors in calculations presented.	Data is mostly accurate. Correct calculations performed.	Accurate debt data collected and correct cost of debt calculations made.
Calculation of Cost of Equity	12	0-3	4-6	7-9	10-12
Incorrect data or no equity data provided. Incorrect cost of equity calculations	Questionable data used. Some errors in calculations presented.	Data is mostly accurate. Correct calculations performed.	Accurate equity data collected and correct cost of debt calculations made.
WACC Calculation	8	0-2	3-4	5-6	7-8
All elements of the WACC calculation are incorrect, or calculation not performed.	Two errors noted in the calculation relating to either cost of debt, cost of equity, or capital structure.	One error noted in the calculation relating to either cost of debt, cost of equity, or capital structure.	WACC Calculation utilizes appropriate cost of debt and equity and capital structure to arrive at a solid result.
Form	8	0-2	3-4	5-6	7-8
Poor writing and presentation skills, or no presentation provided.	Several problems noted in regard to writing and presentation skills.	Writing and presentation done well with a few minor errors	Virtually no errors in writing or presentation.