Financial Management
Estimate the Weighted Average Cost of Capital (WACC)
Part I: Estimate Cost of Equity using discounted cash flow (DCF) model (5 points)
Please calculate the cost of equity using the DCF model: RSÂ = D1/P0Â + g.
So, you need to collect or calculate D1, P0 and g to calculate the cost of equity: RS
 How to get D1, P0, and g?
Go to Yahoo Finance or Google Finance (https://www.google.com/finance ) and get the stock price (P0) and quarterly dividend (Div – multiply it by 4 to get
annual dividend – D1) for your stocks.
Use Dividend Yield – 5 Year Avg, which can be found from several finance sites, including http://www.reuters.com/finance/stocks . Please check under financial to
find Dividend Yield – 5 Year Avg. If you do not find the dividend yield, use the analyst’s forecast of earnings growth rate (EPS – 5 Yr. Growth Rate) as g.
How to calculate the cost of equity? Now you have D1, P0 and g. Put them in the following formula to get R
Put them in the following equation to get RS for your companies: rSÂ = D1/P0Â + g.
Part II:Â Estimate the Weighted Average Cost of Capital (WACC) (15 points)
Again, you may continue working with the same company you picked in your Project Part I. Gather necessary information (cost of equity, cost of preferred stock if any,
cost of debt, and weights on each component, and tax rates) for your companies and calculate the Weighted Average Cost of Capital (WACC). You can find capital
structure information from the most recent consolidated balance sheet (annual) of your company.
Finding the cost of debt is difficult. I would start with company’s latest annual 10-k and search for the most recent senior notes. Similarly, tax rates may be found
in 10-K. For example, if I want to find the cost of debt for United Steel Corporation, I find 6.875% under Capital Structure and Liability. Similarly, I find 35% tax
rate under 8. Income Taxes. For more information, check the following link:
http://www.sec.gov/Archives/edgar/data/1163302/000116330214000010/x2013123110-k.htmÂ
You may use the following link to find your companies’ filling including 10-k.
http://www.sec.gov/edgar/searchedgar/companysearch.htmlÂ
Note: Please feel free to use data from other resources. However, you must provide appropriate references.Â
Please document all your sources of information and any assumptions you made in developing the WACC. Please use the sample solution sent to you at the beginning of
the week via email as a guide:
