Question

(use a current ompany and data)

Week Five Financial Exercises

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 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.

Select a publicly traded company that has debt or bonds and common stock to calculate the current WACC. One good source for financial data for companies, as well as data about their equity, is Yahoo! Finance. 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 the Finra Bonds website. To find data for a particular company’s publicly traded bonds use 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.

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 the Market Risk Premium is 5% unless you can develop a better number.

rf is the risk-free rate. The risk-free rate is normally the yield on US Treasury securities such as a 10-year treasury. For this assignment, please use 3.5%.

You may assume a corporate tax rate of 40%.

Submit the following:

Write a 350- to 700-word report that contains the following elements:

• Your calculated WACC

• How data was used to calculate WACC (provide the formula and the formula with your values substituted)

• Sources for your data

• A discussion of how much confidence you have in your answer, including what the limiting assumptions you made were, if any

Include a Microsoft^®Excel^® file showing your WACC calculations discussed above.

Answer 1

WACC stand for the wighted average cost of capital, with its major components being cost of debt and cost of equity.

Let's start with the calculation of WACC for Apple Inc.

Risk free rate =  10 year maturity bond = 3.5%

Default spread of Apple = 0.63% (Rated AA1 by Moody's)

Equity market risk premium = 5% = (Market return - risk free rate)

Tax rate = 40%

Beta = 1.31

Cost of debt = Risk free rate + default spread = 3.5% + 0.63% = 4.13%

After tax cost of debt = cost of debt * (1 - tax) = 4.13*(1 - .40) = 2.478%

Calculating after tax cost of debt at this point will, save us from calculating it at the point of WACC calculation, thus making our calculation simpler

Cost of equity = Risk free rate + beta*equity risk premium = 3.5% + 1.31*5% = 3.5% + 6.55% = 10.05%

Apple's debt (D)= 122.19 Billion.

Apple's market cap (E)= 2000Billion

D/(D+E) = 122.19/2122.19 = 0.0575

E/(D+E) = 2000/2122.19 = .9424

WACC = (after tax cost of debt * D/(D+E)) + ( cost of equity * E/(D+E))

= 2.478 * 0.0575 + 10.05 * 0.9424

= 0.1424 + 9.47112

=9.61%

Therefore WACC of Apple Inc is 9.61%

The above data like beta, debt, market cap, equity proportion etc have been from the yahoo finance and the financials of the company itself. Confidence bestowed upon the calculation is 100% with no scope of error and complete follow ups of formula and rules.