Assignment Overview This project consists of determining the current weighted average cost of capital for a publicly traded firm. Please read the information below. The Problem As new analysts in the finance department at Genuine Parts (GPC), your team has been tasked with determining the overall weighted average cost of capital (WACC) for the firm.

The rate you determine will be used to evaluate investment projects proposed by departments as they seek funds during the current budgeting process for next year.

To assist in this effort, you have a spreadsheet started by your predecessor containing key data gathered including a sampling of outstanding bonds. Use your research skills to gather the remaining data then complete the requested calculations.

Part One: Complete the provided spreadsheet to arrive at your recommendation for the weighted average cost of capital that should be used by GPC budget officers for capital project evaluation decisions.

Use the provided bond data to estimate the cost of debt and the average market value of debt outstanding for GPC.

o Refer to GPC's most recent 10-K to determine their total debt outstanding. The data in the spreadsheet is only a representative sample of outstanding bonds.

o The 10-K provides a summary table showing the approximate debt maturities by calendar year. Review that table and consider the impact of those maturities on GPC going forward.

o Use the average YTM from the sample bonds as your estimate of GPC's pre-tax cost of debt.

Determine an appropriate tax rate for GPC to calculate the firm's after-tax cost of debt. You may want to rely on Value Line estimates or calculate your own estimate using GPC's 10-K.

o Use the average market value (price) on the proxy bonds to determine the market value of GPC's outstanding debt.

Use 36 months of historical pricing data to calculate the beta of GPC's stock using a Slope function in Excel. Use the SPDR S&P 500 Index Trust (SPY) as your market proxy.

o Confirm your beta estimate by regressing the returns of GPC against SPY for the 36-month period. Comment on the statistical significance of your regression with a particular focus on the adjusted R-squared. What does this tell you about your beta estimate?

o Compare your beta to the Value Line estimate. Consider how your estimate varies from the Value Line estimate and as a group determine the "appropriate" beta estimate for GPC.

Use your estimated beta to determine the cost of equity for GPC using the Capital Asset Pricing Model (CAPM).

o Use the current yield on a 10-year Treasury bond as a proxy for the risk-free rate.

o Estimate the equity risk premium using the data published on Dr. Damodaran's website

Calculate the cost of equity for GPC using the dividend discount formula.

o Use the past four years of dividend growth from Value Line as your estimate for the dividend growth rate (hints: you will need to go back five years as your starting point to get a four-year compound annual growth rate; if the Value Line report shows a partial year for dividends, assume the dividend amount will stay the same for all four quarters of the current year and that we are at the end of the current year - count that as dividend 0).

Compare your cost of equity estimates from the two methods. Determine the "appropriate" cost of equity to use for your WACC calculation.

o Determine the weighted average common shares outstanding assuming dilution (reported on the 10-K) for the most recent year and use that number along with the current share price to determine GPC's equity market capitalization.

Use your above calculations to calculate the weighted average cost of capital for GPC.

Use the Alpha Spread Website to confirm your WACC estimate for GPC. Pay particular attention to how the WACC has changed over time.

Part Two: Write a one-page business memo explaining the following:

1. What is the weighted average cost of capital that should be used for investment decisions in the GPC budgeting process? Discuss the pros and cons of WACC and detail the types of projects the WACC should be used to evaluate and any times where adjustments to the WACC should be considered. Consider how your WACC estimate varies from the Alpha Spread estimate and discuss if you feel any changes need to be made to your work based on Alpha Spread data.

2. Detail the process and key considerations in the calculations for both your cost of debt and cost of equity. Why did you ultimately arrive at your specific estimates?

3. Discuss the impact of the calendar-year bond maturities for GPC. Based on Value Line cash flow estimates, will GPC have difficulty retiring this debt?

4. Review GPC's most recent investor presentation. What guidance does management provide about the firm's debt position? Do you agree with this assessment?

5. Highlight any other particularly noteworthy items your team observed in the calculation or research process.

There is a PDF with links to the10-K, Value Line, 10-Year treasury bond, Dr. Damondaran's website, and Alpha spread website and there is an excel template, but it won't let me upload. I can email them to you.