Financial Management

Assignment 3

Due by the end of day December 5, 2021

In this assignment, you will choose a company of interest and calculate its weighted cost of capital WACC. Assignments should be submitted in the format of excel files, or other formats if you use other programming languages.

Data: 1) choose an estimation period for the required return R, at least going back a 5-year period. 2) download the Monthly adjusted closing price for the company during the estimation period. 3) risk-free rates (annual rates) for the estimation period 4) monthly market index (use S&P 500) Adj Close prices for the estimation period.

5) the companys most recent 10-K filings with Balance Sheet information and tax rate.

You will practice how to 1) Use the beta of the stock, market return, and risk-free rate to calculate the required rate of return, 2) evaluate the stock using constant growth dividend discount model.

Part I. calculate required return R for the stock, i.e. cost of equity

1) calculate monthly return for the stock and market index. Then calculate excess returns = return risk-free rate.

2) Regress the excess return of the stock on the excess return of the market index to estimate beta.

3) Calculate risk-free rate using average of the annual 3-Month Treasury Bill interest rates over the estimation period.

4) Calculate the monthly market return = (Adj close at the end of month Adj close at the end of pervious month)/Adj close at the end of previous month

5) Calculate annualized market return = average monthly return * 12

6) Use the formula to calculate required return R = risk-free rate + beta*(annualized market return risk-free rate).

Part II. the cost of debt.

1) Note: For a company with publicly traded debt, the cost of debt can be measured as the yield to maturity on the outstanding debt. The coupon rate is irrelevant. In this assignment you can use a recent YTM given in FINRA[1] corporate bond data or yield at offering of the bond from the prospectus.

Part III. WACC

1) Calculate the companys debt-to-capital ratio from the balance sheet data

2) Calculate the companys weighted average cost of capital (WACC). WACC = (E/V) R_E + (D/V) R_D(1-T_C)

[1] Source: FINRAs market data center

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