Question

In: Finance

You recently completed your undergraduate degree in Business Administration, majoring in Finance, at University of Scranton....

You recently completed your undergraduate degree in Business Administration, majoring in Finance, at University of Scranton. You are now working at PPL Corporation, at their corporate headquarters, in Allentown, PA. Your first assignment is to estimate the weighted average cost of capital for the company. You can start by studying the annual report of PPL Corporation available at their website. You can use public information about the company, available at various sources, such as Yahoo Finance. You should identify the source of your data. In effect, you have to find the current values of the following quantities for the corporation. If you are unable to find a number precisely, you will have to estimate it.

1. Income tax rate

2. Market value of debt

3. Market value of equity

4. Cost of debt

5. Cost of equity

Please show work in excel and sources.

Solutions

Expert Solution

Source: Yahoo Finance for Balance Sheet and Income Statement and Cash Flow Statement

(https://finance.yahoo.com/quote/PPL/history?p=PPL)

  1. Income tax rate = 41%
    • Formula: (income before tax) * (tax-rate)=Income tax expense
    • $1,912,000,000 * tax-rate = $784,000,000
    • tax-rate=41%
  2. Market value of debt
    • (Source for formla: https://corporatefinanceinstitute.com/resources/knowledge/finance/market-value-of-debt/)
      • Formula: Market Value of Debt = Present value of Total Liabilities for 10 years (weighted average maturity) at cost of debt rate paying total interest per annum as coupon.
      • FV=Total liabilities = $30,718,000000
      • PMT= Coupon interest paid = -$901,000,000
      • N=10 years (weighter average maturity of the bonds and debts)
      • r = cost of debt
      • PV = $5,411,430,079 (Market Value of Debt of PPL)
  3. Market value of equity
    • Formula: MV(equity) = (Current stock price) * (Total outstanding shares)
    • MV(equity) = $29.92 * 699.57 million
    • MV(equity) = $20,931.134 million
  4. Cost of debt
    • Formula: Cost of debt = (total interest paid during the year 2017)/(Total Liabilities as on 31-Dec-2017)
    • Cost of debt = ($901,000,000) / ($30,718,000,000)
    • Cost of debt = 2.933%
  5. Cost of equity
    • Refere attached excel sheet as image for the workings
    • Beta = -1.20193 (slope of y,x)
    • Risk free return Rf = 2.07% (Searched in Google as US risk free retun in 2017)
    • Market return Rm = Monthly average return in 2017, taken from Yahoo Finance. (1.21%)
    • Cost of equity as per CAPM Ke = Rf + (Rm-Rf)*Beta which comes to 3.1037%

jeff jeffy answered 2 years ago
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