determin WACC for a publically traded company , accounting homework help

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timer Asked: Oct 6th, 2016
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Question Description

Your task is to determine the WACC for a company (must be publically traded) using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data.

Assumptions

As you recall, the formula for WACC is

rWACC = (E/E+D) rE + D/(E+D) rD (1-TC)

The formula for the required return on a given equity investment is

ri= rf + βi * (RMkt-rf)

RMkt-rfis the Market Risk Premium. For this project, you may assume that the Market Risk Premium is 4%, unless you can develop a better number.

rf is the risk-free rate. The YTM on 10-year U.S. Treasury securities is a good approximation.

You may assume a corporate tax rate of 40%.

One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company.

There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter. To find data for a particular company’s bonds, find the Quick Search feature. Then, be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula.

If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company.

Deliverable

Write a two or three page report that contains the following elements:

  1. Your calculated WACC

  2. How data were used to calculate WACC. This would be the formula and the formula with your values substituted.

  3. Sources for your data.

  4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any?

  5. When working with Project 2, students may select any publicly traded company.  This e-mail is simply to ensure that each student is fully aware of the assignment requirements - as they are mandatory for all sections of FI515 and not subject to my discretion.

    Overall, you are required to identify the relevant variables and calculate then evaluate the WACC for a company of your choice.  

    To work through the WACC formula, you must first calculate the required rate of return for your company's stock using the CAPM.  As noted in the project instructions, you can use 4% as the assumed market risk premium and the YTM on the 10 year U.S. treasury as the risk-free rate.  You may also assume a tax rate of 40%.  You will need to determine the total amount of equity as well as the beta score for the company you select.  Please see the Project 2 instructions for tips in this area.

    As noted in the grading rubric for this assignment, correctly identifying the WACC inputs and working through the detailed calculations is 30 points of the 50 point total.
    Do not
    simply pull a WACC calculation from an internet-based site as the failure to provide the specific information requested in the rubric is a mandatory deduction.  If you do not show the individual variables, their sources and the detailed calculations, you cannot pass this assignment.

    In addition, providing the specific locations (e.g. internet links) for the information you used in the WACC is required.  Please do not forget to provide this information as it is required and would lead to a 10 point mandatory deduction.

    Finally, write a brief paragraph detailing the assumptions and limitations of your answer.  Again, see the detailed project instructions for specific instructions and be sure to let me know in the weekly question and answer thread if you have any questions.


Second Project The purpose of this project is for you to have some practice working with financial concepts in the real world. This will involve integrating some material from throughout the course. The project will also involve the development of your own approach to doing the work. The project does not provide a stepby-step procedure for you to follow. Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data. With the help of your professor, you have selected a company for which to research and find the WACC. Your research is to be independent from any information you may find at thatswacc.com or similar sites, although you might want to use such sites to provide a reasonableness check on the WACC that you calculate. Assumptions As you recall, the formula for WACC is rWACC = (E/E+D) rE + D/(E+D) rD (1-TC) The formula for the required return on a given equity investment is ri= rf + βi * (RMkt-rf) RMkt-rf is the Market Risk Premium. For this project, you may assume that the Market Risk Premium is 4%, unless you can develop a better number. rf is the risk-free rate. The YTM on 10-year U.S. Treasury securities is a good approximation. You may assume a corporate tax rate of 40%. One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. By looking around this site, you should be able to find the market capitalization (E) as well as the β for any publicly traded company. There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter. To find data for a particular company’s bonds, find the Quick Search feature. Then, be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula. If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company. Deliverable Write a two or three page report that contains the following elements: 1. Your calculated WACC 2. How data were used to calculate WACC. This would be the formula and the formula with your values substituted. 3. Sources for your data. 4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any? Rubric - Second Project Possible Points Data Calculations Evaluation Form Criteria and Point Range 15 0 –3 Little or no data provided. Source of data not clear. 4 –7 Unclear relationship between data and variables. 8–11 Data mostly corresponds to variables. 15 0 –3 Calculations not provided or are generally incorrect. 4 –7 Not all calculations provided or some calculations are incorrect. 8–11 Calculations are nearly but not totally provided or correct. 10 0 –2 Evaluation of answer or limitations and assumptions not discussed. 3 –4 Either evaluation of answer or discussion of limitations and assumptions missing or minimal. 5 –7 Evaluation of answer and discussion of limitations and assumptions provided. Missing some limitations or assumptions. 0 –2 Significant problems with writing or format. 3 –4 Minor problems with writing or format. 5 –7 Writing and format generally correct with a few exceptions. 10 50 12–15 Relationships between data and variables clear and correct. 12–15 Calculations are provided and are correct. 8–10 Complete and thorough discussion of confidence in answer based on limitations and discussions. 8–10 Virtually no errors in writing or format.

Tutor Answer

FinAccGuru
School: UC Berkeley

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Review

Anonymous
Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

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