Problem 2: Estimate the most current Weighted Average Cost of Capital of Rockwell Automation, Inc (ticker: ROK). 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: 1. SECs Edgar database for financial statements and annual or quarterly report (10-K or 10-Q)

2. Stock returns from CRSP database to calculate the beta (an Excel file with the data is available on CANVAS. Column G is the date of the end of the observation month, I is monthly returns on Rockwells stock, L is CRSP value-weighted index, N is S&P 500 index returns).

3. FINRAs TRACE database for public bond yields and prices (https://finra-markets.morningstar.com/BondCenter/Default.jsp)

4. U.S. Treasurys web-site for T-bond rates (https://home.treasury.gov/resource-center/data-chart-center/interest- rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202211)

5. Yahoos finance web-site, NASDAQ.com, or NYSE.com for the stock price around the date of the most recent financial report.

Recipe: a) Calculate the cost of debt using most recent yields from a representative set of Rockwell public bonds. Ensure that the bond was issued by Rockwell Automation, Inc (CUSIP: 773903)

b) Calculate the market value of Rockwell debt using book value of debt adjusted by the price to face value multiple of a set of public bonds of Rockwell.

c) The marginal tax rate is provided.

d) 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, NYSE, or Yahoo.

e) 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 Rockwells 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.

f) Combine it all to calculate Weighted Average Cost of Capital (WACC) for Rockwell.