1.SelectONEcompany to examine

2.Complete theFinancial Analysis Exercise IV Worksheet.

Financial Analysis Exercise IV Worksheet

Part A: Weighted Average Cost of Capital (WACC)

Here again is the formula for WACC. For simplicity the term for preferred stock has been removed:

1.Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled "Calculate WACC."

2.Complete the following tables:

Name of Company/Stock

Ticker Symbol

From the http://thatswacc.com/results for your company:

WACC

Cost of debt, r_D

Corporate tax rate, T_C

Percentage of Financing from Debt. D / V

Cost of equity, re

Percentage of Financing from Equity, E / V

Part B: Dividend Payout and Growth Ratios

Recall from Module 1 the following two ratios:

Internal growth rate = (ROA RR) / [1-(ROA RR)](Eq. 3-32)

where

RR = Retention ratio

= Addition to retained earnings / Net income available to common stockholders(Eq. 3-33)

-The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets

Sustainable growth rate = (ROE RR) / [1-(ROE RR)](Eq. 3-35)

-If the firm uses retained earnings to support asset growth, the firm's capital structure will change, i.e., the share of equity will increase relative to debt

-To maintain the same capital structure managers must use both debt and equity financing to support asset growth

-The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio

1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:

= (ROA RR) / [1-(ROA RR)]

=

2. Calculate the firm's sustainable growth rate for the last fiscal year:

= (ROE RR) / [1-(ROE RR)]

=

Part C

Note: Should the http://thatswacc.com/ not be available you can still respond to the questions below in terms of the effects on WACC of changes in the overall and relative levels of debt and/or equity in the financing of your chosen firm.

1.Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC?

2.If the chosen firm grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC?

3.If the chosen firm attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain.

[1] The accessibility of this site is assumed. Should it not be accessible, please advise your instructor.

1. Select ONE company to examine . Complete the Financial Analysis Exercise IV Worksheet. Financial Analysis Exercise IV Worksheet Part A: Weighted Average Cost of Capital (WACC) Here again is the formula for WACC. For simplicity the term for preferred stock has been removed: ED E+D' E+D'D XQ-TC) 1. Go to http://thatswacc.com/ and enter the ticker symbol for the stock you selected and click on the tab entitled "Calculate WACC." 2. Complete the following tables: Name of Company/Stock Ticker Symbol From the http:/thatswacc.com/ results for your company; WACC Cost of debt, ID. Corporate tax rate, Tc Percentage of Financing from Debt. D/ V The accessibility of this site is assumed. Should Cost of equity, re Percentage of Financing from Equity, E / V Part B: Dividend Payout and Growth Ratios Recall from Module 1 the following two ratios: Internal growth rate = (ROA . RR) / [1-(ROA . RR)] Eq- 3-32) where RR = Retention ratio = Addition to retained earnings / Net income available to common stockholders (Eq. 3-33) The internal growth rate measures the amount of growth a firm can sustain if it financing (retained earnings) to increase assets uses only internal financing ( retain Sustainable growth rate = (ROE . RR) / [1-(ROE . RR)] (Eq. 3-35) If the firm uses retained earnings to support asset growth, the firm's capital structure will change, i.e., the share of equity will increase relative to debt To maintain the same capital structure managers must use both financing to support asset growth The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio 1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year: (ROA . RR) / [1-(ROA . RR)] 2. Calculate the firm's sustainable growth rate for the last fiscal year: (ROE . RR) / [1-(ROE . RR)] Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? . If the chosen firm grows at its sustainable growth rate with increases in both its retained earnings and debt, maintaining a constant debt ratio, how will this affect its WACC? . If the chosen firm attempts to grow faster than its sustainable growth rate with modest increases in its debt ratio, how will this likely affect its WACC? What about very large increases in its debt ratio? Explain