Question
Average Cost of Capital
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 website http://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 is ri = rf + ?i × (RMkt – rf).
ii. Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds.
iii. Calculate the market rate (RMkt) 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. Deliverable 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 rWACC = E ÷ (E + D) rE +
D ÷ (E + D) rD (1 – TC). 1 FIN515: Week 6 Project – Calculating the Weighted
Average Cost of Capital
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
Calculation of
Cost of Debt Calculation of
Cost of Equity WACC
Calculation 12 12 8 Form
8 Criteria and Point Range
0-3 4-6 Incorrect data or no
debt data provided. 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. 4-6
Questionable data
used. Some errors in
calculations
presented. 7-9
Data is mostly
accurate. Correct
calculations
performed. 10-12
Accurate equity
data collected and
correct cost of debt
calculations made. 3-4
Two errors noted in
the calculation
relating to either
cost of debt, cost of
equity, or capital
structure.
3-4
Several problems
noted in regard to
writing and
presentation skills. 5-6
One error noted in
the calculation
relating to either
cost of debt, cost of
equity, or capital
structure.
5-6
Writing and
presentation done
well with a few
minor errors 7-8
WACC Calculation
utilizes appropriate
cost of debt and
equity and capital
structure to arrive
at a solid result.
7-8
Virtually no errors in
writing or
presentation. Incorrect cost of
debt calculations
0-3
Incorrect data or no
equity data
provided.
Incorrect cost of
equity calculations
0-2
All elements of the
WACC calculation
are incorrect, or
calculation not
performed.
0-2
Poor writing and
presentation skills,
or no presentation
provided. 2 7-9 10-12 FIN515: Week 6 Project – Calculating the Weighted
Average Cost of Capital 3
