Calculating the Weighted Average Cost of Capital Company: Apple

You are the key financial management team for your company. The companys CEO is now looking to expand its operations by investing in new property, plant, and equipment. In order to effectively evaluate the projects effectiveness, you have been asked to determine the firms weighted average cost of capital. To determine the cost of capital, here is what you have been asked to do.

Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information for the company you selected. (Be sure that your company has debt on their balance sheet. This will be required in your project.)

Enter your companys name or ticker symbol. Your companys information should appear.

Click on the Financials tab, and select the income statement option. Three years worth of income statements should appear. Copy and paste this data into a spreadsheet.

Repeat step b. above for the balance sheets of the company.

Click on Historical Prices. Capture the closing price of the stock as of the balance sheet date for the three fiscal years used in steps b and c above.

Calculate the Weighted Average Cost of Capital (WACC) for the company:

Cost of Debt

Determine the market value of the firms debt issues. Be sure to review the firms 10-K. Also, the website http://finra-markets.morningstar.com/BondCenter may be of assistance.

You will need to calculate the firms composite YTM on its bonds. This can be achieved by calculating a weighted-average YTM for its bond issues.

After calculating the YTM for the bond issues, calculate the firms after-tax cost of debt. If the firms marginal tax rate cannot be identified in its 10-K, assume that the tax rate will be 35%.

Cost of Equity

Calculate the firms cost of equity using the capital asset pricing model (CAPM). The formula for the CAPM is r_i = r_f + _i (R_Mkt - r_f).

Assume the risk-free rate (r_f) is the current rate of 10-year U.S. Treasury Bonds.

Calculate the market rate (R_Mkt) by calculating the market return on the Standard & Poors 500 for the past 2 calendar years.

The beta for the firm can be obtained from Yahoo! Finance.

Calculate the WACC

Determine the market capitalization of the firms common equity and preferred equity, if any.

Determine the firms capital structure based on the market value of the firms equity and debt. The market value of the firms debt can be obtained from the Morningstar website, listed in the Cost of Debt section above.

Calculate the WACC. As you recall, the formula for WACC is r_WACC = E (E + D) r_E + D (E + D) r_D (1 - T_C).

Apple's Finance: https://finance.yahoo.com/quote/AAPL/financials Apple's 10k: http://investor.apple.com/secfiling.cfm?filingID=1628280-16-20309&CIK=320193