Honda Auto Manufacturing Industry

The automotive industry is facing major declines in revenue as well as increasing risk as the industry shifts from gas powered vehicles to electric power. These increased risks will increase Hondas WACC. WACC is a rate that companies use to evaluate the risk in buying a business or buying stock. The higher the WACC the better it is for the investor and the worse it is for the company. It is better for investors because the WACC increases the rate of return on the investment to mitigate risk. The company loses in the deal because they must pay higher interest rates. Paying higher interest rates decreases the liquidity and solvency of the company. If the company were going to be bought, a high WACC would decrease its valuation because it would decrease the NPV of the business.

The automotive industry is extremely risky. The sector represented 20% of GDP slowdown in 2018 and roughly 30% of the year's drop in global trade, according to the International Monetary Fund (Winck, 2019). An industry declining 20%+ means that if investors infuse their cash, they have a high probability of not getting it back. They will account for this by increasing their WACC just in case they do not get an adequate return. Waning profits are forcing U.S. automakers to narrow their investments next-generation technology as the most-profitable vehicles light trucks face tougher competition and slackening demand. Price and margin concessions aimed at extending a multiyear post-peak sales plateau have combined with unprofitable new technology to sap almost $3 billion in operating profit from automakers in the past 12 months (Global automobile manufacturing industry outlook, 2019). Reduced R&D expenditure means that there is less money going toward developing new products that can compete and defend/gain market share. Innovation is necessary for a company to survive in an ever-changing global marketplace. Investors will interpret this as a less than likely chance of maximizing their capital gains and account for it by raising the WACC. Uncertainty in the market will always lead to higher WACC to account for the risk investors are taking.

Requirement: Provide feedback on the above post, including different examples related to the risks and their impacts on the above industry or company . Comment on the similarities and differences in the post above compared to the following post:

Nestle Company is a multinational food and drinks processing conglomerate corporation that is headquartered in Vevey, Vaud, in Switzerland. Notably, Nestle Company is the largest food company in the world, measured by revenues and other metrics, since 2014. This assignment seeks an analysis for the WACC of the chosen company. Therefore, the section presented below portrays WACC analysis of the Nestle Company in the food processing industry.

The weighted average cost of capital is the rate that a company is likely to pay on average to all its security pouches to finance its assets. The WACC is generally referred to as the organization's cost of capital. Prominently, it is verbalized by the external market and not by management, either debt or equity finances Nestle Company's assets. The WACC is referred as the average of all these sources of financing, each of which is weighted by its respective usage. Also, WACC is described as the weighted average rate of return an organization theoretically pays to its debt and equity promoters to recompense for the risks, they perceive by investing their capital. According to WACC for Nestle's S.A (2020), the WACC in Nestle Company is 7.0. therefore, this indicates that the company is a multinational operating under many competitors in the industry. With respect to how the Nestle Company benchmarks its WACC against its competitors, this source has identified the various companies as similar to Nestl S.A. since they operate in a related industry or sector. Also, the source has considered size, growth, and different financial metrics to narrow down the list of companies. Therefore, the file is provided in the source.

There are numerous risks that the Nestle Company faces in the current economic and political environment that most likely affect its WACC. The risk-free rate of return is stereotypically valued using the rate of return of short-term Treasury bills since most of these securities have steady values with absolute returns supported by the government. The market risk premium equals the market return less the risk-free rate and replicates the ratio of investment return attributed to stock market volatility. Additionally, a higher cost of capital for the company might also increase the risk that it will default. That would raise the default premium and further enhance the interest rate used for the WACC (Fernandez, 2019). Therefore, it is essential to note that when interest rates rise, the risk free-rate also increases, thus impacting the entire WACC of the Nestle Company in the food processing industry. Another significant risk that affects the Nestle Company's WACC is the overall tax rate from the government. In this case, it is noted that when the rate is high, there is an ultimate increase in the WACC (Kruschwitz & Lffler, 2020). On the other hand, a decrease in the tax rate leads to reduces the WACC in the Nestle Company. Therefore, economic and political environments play pivotal roles in determining the WACC of the Nestle Company in the food processing industry.