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/BondCenter may 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 is r_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.