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Estimate the most current Weighted Average Cost of Capital of FISERV INC (ticker: FISV). Use CAPM to estimate the cost of equity. Assume that the
Estimate the most current Weighted Average Cost of Capital of FISERV INC (ticker: FISV). Use CAPM to estimate the cost of equity. Assume that the capital structure (the market debt-to-equity ratio) observed as of the most recent annual financial statements remains in place forever for the company. Also assume that the market risk premium is 5% and that the marginal tax rate is 21%.
Suggested sources of the data:
- SECs Edgar database for financial statements and annual or quarterly report (10-K or 10-Q)
- Stock returns from CRSP database to calculate the beta (an Excel file with the data is available on CANVAS. Column B is the date of the end of the observation month, K is monthly returns on Fiservs stock, M is CRSP value-weighted index, O is S&P 500 index returns).
- FINRAs TRACE database for public bond yields and prices
- U.S. Treasurys web-site for T-bond rates
- Yahoos finance web-site or NASDAQ.com for the stock price around the date of the most recent financial report.
Recipe:
- Calculate the cost of debt using most recent yields from a representative set of Fiserv public bonds.
- Calculate the market value of Fiserv debt using book value of debt adjusted by the price to face value multiple of a set of public bonds of Fiserv.
- The marginal tax rate is provided.
- Calculate the market value of equity using number of shares outstanding from the most recent financial report and historical stock price as of that date from NASDAQ or Yahoo.
- Calculate the cost of equity using CAPM. For that, you are provided the market risk premium. Use current yield on the 10-year Treasury bond as the risk-free rate, and calculate the beta of Fiserv stock using 5 years of monthly stock returns and VW CRSP portfolio as the market portfolio. Data on stock returns are provided in the Excel file using CRSP database.
- Combine it all to calculate Weighted Average Cost of Capital (WACC) for Fiserv.
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