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Second Project The purpose of this project is for you to have some practice working with financial concepts in the real world. This will involve integrating some material from throughout the course. The project will also involve the development of your own approach to doing the work. The project does not provide a stepby-step procedure for you to follow. Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data. With the help of your professor, you have selected a company for which to research and find the WACC. Your research is to be independent from any information you may find at thatswacc.com or similar sites, although you might want to use such sites to provide a reasonableness check on the WACC that you calculate. Assumptions As you recall, the formula for WACC is rWACC = (E/E+D) rE + D/(E+D) rD (1-TC) The formula for the required return on a given equity investment is ri= rf + i * (RMkt-rf) RMkt-rf is the Market Risk Premium. For this project, you may assume that the Market Risk Premium is 4%, unless you can develop a better number. rf is the risk-free rate. The YTM on 10-year U.S. Treasury securities is a good approximation. You may assume a corporate tax rate of 40%. One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com. By looking around this site, you should be able to find the market capitalization (E) as well as the for any publicly traded company. There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter. To find data for a particular company's bonds, find the Quick Search feature. Then, be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company's outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula. If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company. Deliverable Write a two or three page report that contains the following elements: 1. Your calculated WACC 2. How data were used to calculate WACC. This would be the formula and the formula with your values substituted. 3. Sources for your data. 4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any? Rubric - Second Project Possible Points Data Calculations Evaluation Form Criteria and Point Range 15 0-3 4- 7 Little or no data Unclear relationship provided. Source of between data and data not clear. variables. 8-11 Data mostly corresponds to variables. 15 0-3 Calculations not provided or are generally incorrect. 4- 7 Not all calculations provided or some calculations are incorrect. 8-11 Calculations are nearly but not totally provided or correct. 10 0-2 Evaluation of answer or limitations and assumptions not discussed. 3- 4 Either evaluation of answer or discussion of limitations and assumptions missing or minimal. 5- 7 Evaluation of answer and discussion of limitations and assumptions provided. Missing some limitations or assumptions. 0-2 Significant problems with writing or format. 3- 4 Minor problems with writing or format. 5- 7 Writing and format generally correct with a few exceptions. 10 50 12-15 Relationships between data and variables clear and correct. 12-15 Calculations are provided and are correct. 8-10 Complete and thorough discussion of confidence in answer based on limitations and discussions. 8-10 Virtually no errors in writing or format. Second Course Project 1 FIN 515 SECOND COURSE PROJECT Prepared By Submitted to SECOND COURSE PROJECT 2 INTRODUCTION: The company that I choose to prepare my project is \"Hershey Co.\" Not only it produces one of the largest sweets and confectionary products but also is very popular among young kids and adults. Being a finance student this company had always made me curious and wanting to learn more about its market values and financial structures. Recently I received a promotion coupon to visit Hershey world-class amusement park, exclusive resorts, and attractions. This is moment I realized this company is much bigger than I had expected. It would be great to calculate this company market risk premium, beta co-efficient. Equity and WACC for this project. HERSHEY CO: The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. It is also known as global leader in chocolate and sugar confectionery. The offers pantry items, such as toppings beverages, baking products, snacks, such as spreads, and gum and mint refreshment products. It has more than 80 brand names in approximately 70 countries. According to U.S. data provided by Hershey's, this company maintains 43% to 31% lead over Mars in chocolate-based product sales, while Mars has a slim 31% to 29% lead in overall confectionery sales. It is the largest producer of chocolates in North America. The company operate under a matrix reporting structure designed to ensure continued focus on North America, coupled with an emphasis on accelerating growth in the international markets, as it continues to transform into a more global company. SECOND COURSE PROJECT 3 WEIGHTED AVERAGE COST OF CAPITAL: It is a rate of return that a company expects to compensates its investors. Weighted average cost of capital is tool or estimator that helps to judge the project's increasing shareholder wealth or the compensation cost. It is very substantial for the future projects. It is an estimation that the management uses for the long run. The lower the WACC the better for the company to fund new and future projects. Weighted average cost of capital is calculated by the company's cost of capital structure, multiplying with the total capital and then summing it up. Ideally market values are taken but if market values are not available then book value is taken. WACC is calculated by the following formula RWACC= (E/E+D) rE + D/(E+D) rD (1-TC) OR WACC = r(E) w(E) + r(D) (1 - t) w(D) r(E) is the cost of equity A company must earn to keep its common stock price from falling r(D) (1 - t) is the after-tax cost of debt Cost of debt of a company is based on the yield to maturity w(E) is the weight of equity in the company's total capital It is done by summing up the market values of equity and debt. w(D) is the weight of debt component in the company's capital structure SECOND COURSE PROJECT 4 BETA COEFFICIENT: The formula for beta coefficient is: B= Correlation Coefficient (between market and stock) * Standard Deviation of Stock Returns / Standard Deviation of Market Returns. Beta coefficient is required for the rate of return on the stock Coefficient below 1 is for below average risk and return while higher than 1 is for above average risk and return. It is a measure of funds/stock risk in relation to the market. ESTIMATING HERSHEY. CO WACC Retrieving the data from google finance, I found Hershey .Co latest data on (NYSE:HSY). I will be taking these figures to show my work and calculation of WACC. So Hershey has 158.73 million shares of common stock and their shares are currently trading at $96.70 per share. Their market risk premium is 8% and their current risk rate is 4%. The beta coefficient is 0.33. I evaluated that the bonds that were issued is of 50,000 of $1000 par value with 10% coupon rate annually along with maturing in 20 years. Their current trading rate for the bonds are $950. The co-operate tax rate is 40%. Using the formula as mentioned above: WACC = r(E) w(E) + r(D) (1 - t) w(D) In order to calculate the weighted average cost of capital WACC of Hershey. Co we need to find the equity and debt. EQUITY = 158, 0000.73 * 96.70 = 15,786,070.58.59 SECOND COURSE PROJECT 5 DEBT = 50,000 * 950 = 47,500,000 TOTAL OF EQUITY + DEBT 15,786,070.58.59+ 47,500,000 = 63,286,070.59 WEIGHT OF EQUITY =15,786,070.58.59 / 63,286,070.59 = 24.94% WEIGHT OF DEBT = 47,500,000 / 63,286,070.59 = 75.05% Weight of debt can also be calculated by subtracting 100% - 24.94% = 75.06% The current data available allow us to use only CAPM to calculate cost of equity. Cost of Equity = Risk Free Rate + Beta Market Risk Premium = 4% + 0.33 8% = 6.64% Using the excel formula for RATE function, I found the yield to maturity is 10.61% AFTER TAX COST OF DEBT = 10.61% (1-40%) = 6.36% Now summing all the value together WACC = 24.94% * 6.64% + 75.06% * 6.36% = 6.42% So the WACC of Hershey. Co that I calculated with the available data is 6.42% CONCLUSION: The WACC increases as the rate of return and beta on equity increases, while WACC decreases in valuation and a higher risk. Overall it is a required rate of return of a company as a whole. This estimation is used by the company directors to determine opportunities and mergers. WACC SECOND COURSE PROJECT 6 serves as a useful reality check for company holders. Looking at the figures of Hershey Co the WACC is 6.42% which is in good standing. SECOND COURSE PROJECT 7 https://www.thehersheycompany.com/investors/stock-information/stock fundamentals.aspx http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=HSY http://www.nasdaq.com/symbol/hsy#ixzz3oDus179q https://www.google.com/finance?q=NYSE%3AHSY&ei=vTUbVqjOJ4O42Abl3o74Dw https://www.thehersheycompany.comewsroomews-release.aspx?id=1357461 http://quotes.wsj.com/HSY http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=HSY&Country=usa SECOND COURSE PROJECT 8 Footnotes SECOND COURSE PROJECT 9 Tables Table 1