Dillards Cost of Capital Estimation

You work in Dillards department stores corporate finance and treasury department and have just been assigned to the team estimating Dillards WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly realize that the information you need is readily available online.

Go to http://finance.yahoo.com. Under Market Summary, you will find the yield to maturity for ten-year

Treasury bonds listed as 10 Yr Bond (%). Collect this number as your risk-free rate.

In the box next to the Get Quotes button, type Dillards ticker symbol (DDS) and press enter. Once you see

the basic information for Dillards, find and click Key Statistics on the left side of the screen. From the key statistics, collect Dillards market capitalization (its market value of equity), enterprise value (market-value equity + net debt), cash, and beta.

To get Dillards cost of debt and the market value of its long-term debt, you will need the price and yield to

maturity on the firms existing long-term bonds. Go to http://www.finra.org click investors and then under market data click on bonds. Under Quick Bond Search, click Corporate and type Dillards ticker symbol. A list of Dillards outstanding bond issues will appear. Assume that Dillards policy is to use the expected return on non-callable ten-year obligations as its cost of debt.

Find the non-callable bond issue that is as close to 10 years from maturity as possible. (Hint: You will see a column titled Callable; make sure the issue you choose has No in this column.)Find the yield to maturity for your chosen bond issue (it is in the column titled Yield). Hold the mouse over the table of Dillards bonds and right-click. Select Export to Microsoft Excel. (Note that this option is available in IE, but may not be in other browsers.) An Excel spreadsheet with all of the data in the table will appear.

You now have the price for each bond issue, but you need to know the size of the issue. Returning to the Web

page, click Dillards in the first row. This brings up a Web page with all of the information about the bond issue. Scroll down until you find Amount Outstanding on the right side. Noting that this amount is quoted in thousands of dollars (e.g., $60,000 means $60 million =$60,000,000), record the issue amount in the appropriate row of your spreadsheet. Repeat this step for all of the bond issues.

The price for each bond issue in your spreadsheet is reported as a percentage of the bonds par value. For

example, 104.50 mean that the bond issue is trading at 104.5% of its par value. You can calculate the market value of each bond issue by multiplying the amount outstanding by (Price 100). Do so for each issue and then calculate the total of all the bond issues. This is the market value of Dillards debt.

Compute the weights for Dillards equity and debt based on the market value of equity and Dillards market

value of debt, computed in Step 5.

Calculate Dillards cost of equity capital using the CAPM, the risk-free rate you collected in Step 1, and a

market risk premium of 5%.

Assuming that Dillards has a tax rate of 35%, calculate its effective cost of debt capital.

Calculate Dillards WACC.

Calculate Dillards net debt by subtracting its cash (collected in Step 2) from its debt. Recalculate the

weights for the WACC using the market value of equity, net debt, and enterprise value. Recalculate Dillards WACC using the weights based on the net debt. How much does it change?