Company Cost of Capital Analysis
In this assignment you calculate and interpret the cost of capital for your selected company by conducting a detailed analysis of the company’s Weighted Average Cost of Capital (WACC).
You should select a large publicly traded company (such as Microsoft, Google, IBM, Disney, etc.). Please select a company that has been public for at least 3 years.
1. Calculation of WACC
You need to identify each component of the WACC formula and calculate the overall WACC.
The WACC formula for a company that uses debt and equity is as follows:
WACC = % Debt * Cost of Debt * (1 – Tax Rate) + % Equity * Cost of Equity
You should use Yahoo! Finance to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement.
- Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, “Short/Current Long Term Debt”)
- Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)
- % Debt = Debt / (Debt + Equity)
- % Equity = 1 – % Debt
- Cost of Debt = Interest Expense / Debt
- Tax Rate = Income Tax Expense / Income Before Tax
- Cost of Equity: Use the below CAPM equation to calculate this
Cost of Equity = Risk free rate + Beta * (Market Risk Premium)
- Risk free rate: look up the yield on 10 year US Treasury bonds
- Beta: This is on the Key Statistics page in Yahoo! Finance
- Market Risk Premium: Assume 11% minus the risk-free rate
2. Interpretation of WACC for Your Company
Indicate what the WACC value you derived means for your company. What role does the WACC play for company managers when they are evaluating new projects to undertake? How would company managers and investors use the WACC for an overall company valuation analysis?
3. Paper Mechanics
Please complete your work in Excel. For the calculation section of the assignment, each parameter, its data and the corresponding calculations should be clearly indicated and easy to follow. Your spreadsheet should be professional in its presentation with appropriate formatting and organization.