Question

a. Search Yahoo Finance or any other credible source to retrieve the most recent income statement and balance sheet for a major leveraged corporation. Provide these statements in proper format. Also, retrieve the data on the company's stock annual rate of return for the past 20 years. In addition, retrieve annual rate of return of a major financial index. Present this data as well. Using the data on company's stock rate of return and the index's rate of return estimate beta of the corporation. Make sure to adjust this value to obtain leveraged beta. Compare this value with the value stated by the source. Retrieve the risk-free rate of return as the annual interest rate of US treasuries. Based on these values estimate the expected annual rate of return of the corporation's security. Using the financial statements mentioned above estimate the annual rate of interest paid by the corporation (cost of debt). Also, find the tax rate and capitalization ratio (proportions among equity and debt). Using these values that you have found estimate the annual weighted cost of capital (WACC) of the corporation.

b. Suppose that the corporation is offered an investment which has the following cash flows.

Year	Cash flow
0	-$10,000.000
1	$1,500,000
2	$1,500,000
3	$1,500,000
4	$1,500,000
5	$1,500,000
6	$1,500,000
7	$1,500,000
8	$1,500,000
9	$1,500,000
10	$1,500,000

Based on WACC, Is this investment viable?

For each part above state the problem before answering the questions, provide clear justifications, explain your work in detail, and cite all references used for development of the content.

Answer 1

The beta calculation is shown below

The source specifies a beta of 0.64

The risk free rate represented by 30 year yield of US treasuries is 2.86% and equity premium is 5.54% so the expected return = Rf + beta*(Rm-Rf)

= 2.86%+0.19*(5.54%)=3.91%

As per financial statement, the cost of debt is 3.09% (calculated using interest expense/average debt)

Tax rate = 16% for period ending Jan 2017 & 20% for Jan 2016

The debt/equity ratio is 0.38 for Jan 2017

So WACC = 0.72*3.91%+0.28*(1-20%)*3.09%

WACC = 3.50%

For the investment having cash flow

Year	Cash flow
0	-10000000
1	1500000
2	1500000
3	1500000
4	1500000
5	1500000
6	1500000
7	1500000
8	1500000
9	1500000
10	1500000

The IRR is 8.14% which is more than WACC and hence proposal is acceptable