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Finance Week 6 Project 1

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Economics

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FIN515: Week 6 Project – Calculating the Weighted Average Cost of Capital

Target Corporation (TGT)

a. Cost of Debt

The market value of the firm’s debt is $12,749,000,000.

The interest expense from the income statement is $1,004,000,000

Therefore, composite YTM= ($1,004,000,000/$12,749,000,000)*100%=7.8751%

Assuming tax rate is 35%, the firm’s after tax cost of debt will be 7.8751 %*( 1-0.35)

After tax cost of debt =5.1188%

b. Cost of Equity

We are calculating the firm’s cost of equity using capital asset pricing model (CAPM).

The formula is given as ri

= r

+ β

× (R

Mkt

- r

). The beta of the company is 0.33 and a 10 Year

U.S. Treasury Bond rate is 2.35%. We can obtain market rate by using the formula market

return= {(ending price-starting price)/starting price} *100% (figure 2). However, market return

on the Standard & Poor’s 500 for the past 2 calendar years are provided and the average monthly

market return=1.02%. We need to annualize the market return by multiplying it by 12 to get

12.24% per annum.

Since Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the

Market - Risk-Free Rate of Return)

Therefore, cost of equity= 2.35%+0.33*(12.24%-2.35%) = 5.6137%

Cost of equity= 2.35%+3.2637%=5.6137%

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FIN515: Week 6 Project – Calculating the Weighted Average Cost of Capital

c. Calculate the WACC

The market value of equity (E) is also called "Market Cap (M)". As of today, Target

Corp's market capitalization (E) is $32877.692 Million. On the other hand, the Capital structure

(based on the market value of the firm’s equity and debt) is obtained as shown below:

a) Weight of equity = Equity value (E) / (Equity value (E) + Debt value (D)) = 32877.692 /

(32877.692 + 12754.5) = 0.7205

b) Weight of debt = Debt value (D) / (Equity value (E) + Debt value (D) = 12754.5 /

(32877.692} + 12754.5) = 0.2795

Weighted Average Cost of Capital is given by the formula below:

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

Therefore WACC=0.7205*5.6137%+0.2795*5.1188

WACC=4.0447%+1.4307%

WACC=5.4754%

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FIN515: Week 6 Project – Calculating the Weighted Average Cost of Capital Target Corporation (TGT) a. Cost of Debt The market value of the firm’s debt is $12,749,000,000. The interest expense from the income statement is $1,004,000,000 Therefore, composite YTM= ($1,004,000,000/$12,749,000,000)*100%=7.8751% Assuming tax rate is 35%, the firm’s after tax cost of debt will be 7.8751 %*( 1-0.35) After tax cost of debt =5.1188% b. Cost of Equity We are calculating the firm’s cost of equity using capital asset pricing model (CAPM). The formula is given as ri = rf + βi × (RMkt - rf). The beta of the company is 0.33 and a 10 Year U.S. Treasury Bond rate is 2.35%. We can obtain market rate by using the formula market return= {(ending price-starting price)/starting price} *100% (figure 2). However, market return on the Standard & Poor’s 500 for the past 2 calendar years are provided an ...
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