Company using for Project 3 Hewlett-Packard Company (HPQ) - IT

Research Project 3

From the text, the Weighted Average Cost of Capital is:

WACC = (E/V) x R_E + (D/V) x R_D x (1- T_C) (Eq. 14-6)

In this Research Project, the WACC for a selected company will be determined. Fill in the table to identify your selected company:

Name of Company/Stock
Ticker Symbol

Part 1: Cost of Debt[1]

Complete the following table to arrive at the Cost of Debt and Tax Rate.

Interest Income (Expense) last 2 years avg
Earnings Before Tax last 3 years total
Taxation last 3 years total
Corporate Tax Rate, TC[2]
Current Debt
LT Debt & Leases
Total Debt
Cost of Debt[3]

Part 2: Cost of Equity and CAPM Components

Complete the table and determine the cost of equity. Show your calculations.

Beta, E
Historical Market Return, iM	Assume 9%
Risk Free Rate, if	Assume 2%
Cost of Equity, iE

Part 3: Weighted Average Cost of Capital

Draw on your work in Parts 1 and 2 to determine D/V and E/V.

Total Debt Value
Total Equity Value
Total Firm Value
Total Debt to Total Firm Value (D/V)
Total Equity to Total Firm Value (E/V)

Show your calculation of your selected companys WACC.

Suppose the company you selected embarked on a recapitalization that relied upon a 50% D/V and a 50% E/V. Assuming that the component costs stayed the same, calculate the companys WACC under this scenario. Show your calculation. Would it make sense for the company to make this change?

Part 4: Sustainable Growth

Recall from Module 1, that a firm can achieve its Sustainable Growth Rate by using internal equity financing and a constant debt ratio.

Sustainable growth rate = (ROE b) / [1-(ROE b)] (Eq. 4-3)

As defined in the text, b is the retention or plowback ratio. For your selected company, use Mergents data to calculate the Sustainable Growth Rate for the most recent period. Show your calculations. How would you interpret the result for the company you selected? Does this seem reasonable to you?

Respond: if your selected company chooses to grow at its Sustainable Growth Rate, with increases in both retained earnings and debt, how will this influence its WACC?

[1] The inputs from Mergent provide a close approximation to the Cost of Debt

[2] Divide the Taxation last 3 years line item by Earnings Before Tax for the last 3 years, as a percent

[3] Interest Income (Expense) last 2-year average divided by the Total Debt