BUS 311 Checkpoint Project Step 2: Cost of Capital Analysis Q8. Cost of capital (to be finished with Excel template) What does the Weighted Average Cost of Capital mean? 1) The average cost of financing or hurdle rate for the business 2) The average return required by the capital providers 3) The opportunity cost for the capital providers Calculate the WACC for your selected firm. before tax Amount cost Debt 22,750.00 21.41% 3.14% Equity 83,490.00 78.59% 15.30% Preferred | 0.00 0.00% 0.00% after tax cost 2.04% 15.30% 0.00% cost component 0.44% 12.03% 0.00% tax rate 35% Total Capital 106,240.00 WACC 12.46% Calculation details: See the attached spreadsheet for the cost calculation of debt, equity and preferred. Assume tax rate = 35%. WACC = (weight of debt) * (cost of debt) * (1 - tax rate ) + (weight of equity) * (cost of equity) + (weight of preferred) * (cost of preferred) - = Wd* Rd *(1-T) + We * Re + Wp * Rp = ??? Economic value added The business needs to achieve higher return than the WACC to be profitable. Meanwhile, the WACC is the expected return from the capital providers. The dollar amount business can achieve beyond the opportunity cost of capital is called economic value added. Question: Did the company achieve positive or negative Economic Value Added? 1. If positive, what does it mean and how does it imply over the company financials? 2. If necessary, what caused the negative results? How would the company improve? Economic Value Added EBIT (1-T) - Investor Supplied Capital * WACC -?? tax rate (T) EBIT EBIT * (1-T) WACC Investor supplied capital?? Economic value added ?? Q9. Summary (detailed analysis is required) Question: Did the company achieve positive or negative Economic Value Added? 1. If positive, what does it mean and how does it imply over the company financials? 2. If necessary, what caused the negative results? How would the company improve? Economic Value Added EBIT* (1-T) - Investor Supplied Capital * WACC = ?? tax rate (T) EBIT EBIT * (1-T) WACC Investor supplied capital 22 Economic value added ?? 09. Summary (detailed analysis is required) 9-1. List your overall conclusion on the financial analysis, 9-2. Make a recommendation on the company's financial condition as excellent, healthy, or ill. 9-3. Were the financial ratios and indicators an accurate reflection of the business performance? 9-4. Is the stock over, under, or fairly-priced? 9-5. Is the stock a good investment candidate? Buy or Sell? BUS 311 Checkpoint Project Step 2: Cost of Capital Analysis Q8. Cost of capital (to be finished with Excel template) What does the Weighted Average Cost of Capital mean? 1) The average cost of financing or hurdle rate for the business 2) The average return required by the capital providers 3) The opportunity cost for the capital providers Calculate the WACC for your selected firm. before tax Amount cost Debt 22,750.00 21.41% 3.14% Equity 83,490.00 78.59% 15.30% Preferred | 0.00 0.00% 0.00% after tax cost 2.04% 15.30% 0.00% cost component 0.44% 12.03% 0.00% tax rate 35% Total Capital 106,240.00 WACC 12.46% Calculation details: See the attached spreadsheet for the cost calculation of debt, equity and preferred. Assume tax rate = 35%. WACC = (weight of debt) * (cost of debt) * (1 - tax rate ) + (weight of equity) * (cost of equity) + (weight of preferred) * (cost of preferred) - = Wd* Rd *(1-T) + We * Re + Wp * Rp = ??? Economic value added The business needs to achieve higher return than the WACC to be profitable. Meanwhile, the WACC is the expected return from the capital providers. The dollar amount business can achieve beyond the opportunity cost of capital is called economic value added. Question: Did the company achieve positive or negative Economic Value Added? 1. If positive, what does it mean and how does it imply over the company financials? 2. If necessary, what caused the negative results? How would the company improve? Economic Value Added EBIT (1-T) - Investor Supplied Capital * WACC -?? tax rate (T) EBIT EBIT * (1-T) WACC Investor supplied capital?? Economic value added ?? Q9. Summary (detailed analysis is required) Question: Did the company achieve positive or negative Economic Value Added? 1. If positive, what does it mean and how does it imply over the company financials? 2. If necessary, what caused the negative results? How would the company improve? Economic Value Added EBIT* (1-T) - Investor Supplied Capital * WACC = ?? tax rate (T) EBIT EBIT * (1-T) WACC Investor supplied capital 22 Economic value added ?? 09. Summary (detailed analysis is required) 9-1. List your overall conclusion on the financial analysis, 9-2. Make a recommendation on the company's financial condition as excellent, healthy, or ill. 9-3. Were the financial ratios and indicators an accurate reflection of the business performance? 9-4. Is the stock over, under, or fairly-priced? 9-5. Is the stock a good investment candidate? Buy or Sell