Question
Estimate your companys weighted average cost of capital. Explain all assumptions, sources, and calculations. a. Estimate the weights (debt and equity). This means you need
Estimate your companys weighted average cost of capital. Explain all assumptions, sources, and calculations.
a. Estimate the weights (debt and equity). This means you need to find the market value of equity (number of shares outstanding times the price per share) and you can use the book value of debt (this means using the balance sheet; remember book value and market value are not far apart when looking at debt). Describe what you did in your memo and include values (E, D, and V).
b. Estimate the cost of equity. This means you should use the capital asset pricing model; you need to find the inputs to the model (i.e., the risk-free rate, the market risk premium, and beta). Describe your sources and your assumptions. Include the value that you calculated (Ke).
I recommend that you use S&P NetAdvantage Capital IQ to research most of the information needed for the memo. Helpful tabs within Capital IQ include the Tearsheet, Financials, and Markets. You may also find Bloomberg, Yahoo Finance, and the WSJ to be helpful resources.
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