The WACC Project Instructions Company that was chosen is APPLE The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time Actual managers would need to know their companys WACC as a starting point to estimate the discount rate to use in the net present value analysis of new projects (or of termination decisions) You may need to know the technique for application in some case study solutions The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources with little guidance, and in applying sound judgment when encountering naturally occurring measurement errors Picking Your Corporation APPLE Company Each person should pick a different corporation This is not a group project The corporation must be a publicly traded company Many well known companies are not publicly traded For example, Publix, Albertsons, Deloitte are private companies and cannot be used for this project Avoid public utilities (FPL, telephone companies, etc ) Because of regulation, their WACCs have a different meaning Avoid financial companies (banks, insurance companies, brokers, etc ) Because of regulation, their capital structures are difficult to discern Your corporation must have common equity and long term debt (debt with maturity dates of more than 1 year) The Primary Equations The theory of why managers should use the WACC in net present value analysis comes later in the course For now, start with the equations for WACC, per se 1 Estimate the Marginal Cost of Debt Marginal Cost of Debt This is an estimate of the interest rate the corporation would have to pay on new borrowing 1 Method 1 Try to find the yield to maturity on your firms long term debt Try google and see what you find Method 2 Try to find your corporations Standard and Poors issuer debt rating Again, try google Then look on page 205 in your textbook at the table and estimate an appropriate rate For example, if you find the rating is AA , which would fall between AA and A, you may decide to choose 4 5 (which is between the 4 40 and 4 62 in the 25 year section) Method 4 k d r f premium In this method, add a premium to the risk free rate (Rf) ( See below for how to obtain Rf) You can use information from page 205 to guide you For example, lets say you did not find your firms issuer credit rating, you can make an educated guess of what it would be, and then add an appropriate premium to Rf For example, if you guess the credit rating should be an A, the difference in the 25 year row of page 205 is 1 81 percentage points (4 62 2 81 for the Treasury) Take the Rf rate and add 1 81 to it for your estimate of Kd

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The WACC Project Instructions Company that was chosen is APPLE The assignment is to estimate the weighted average cost of capital (WACC) for an actual

The WACC Project Instructions

Company that was chosen is APPLE

The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their companys WACC as a starting point to estimate the discount rate to use in the net present value analysis of new projects (or of termination decisions). You may need to know the technique for application in some case study solutions.

The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources with little guidance, and in applying sound judgment when encountering naturally occurring measurement errors.

Picking Your Corporation: APPLE Company

Each person should pick a different corporation. This is not a group project.
The corporation must be a publicly traded company. Many well-known companies are not publicly traded. For example, Publix, Albertsons, Deloitte are private companies and cannot be used for this project.
Avoid public utilities (FPL, telephone companies, etc.) Because of regulation, their WACCs have a different meaning.
Avoid financial companies (banks, insurance companies, brokers, etc.). Because of regulation, their capital structures are difficult to discern.
Your corporation must have common equity and long-term debt (debt with maturity dates of more than 1 year).

The Primary Equations

The theory of why managers should use the WACC in net present value analysis comes later in the course. For now, start with the equations for WACC, per se:

1. Estimate the Marginal Cost of Debt

Marginal Cost of Debt: This is an estimate of the interest rate the corporation would have to pay on new borrowing.[1]

Method 1: Try to find the yield to maturity on your firms long-term debt. Try google and see what you find.

Method 2: Try to find your corporations Standard and Poors issuer debt rating. Again, try google. Then look on page 205 in your textbook at the table and estimate an appropriate rate. For example, if you find the rating is AA-, which would fall between AA and A, you may decide to choose 4.5% (which is between the 4.40 %and 4.62% in the 25-year section)

Method 4: k_d = r_f + premium

In this method, add a premium to the risk-free rate (Rf). (See below for how to obtain Rf). You can use information from page 205 to guide you. For example, lets say you did not find your firms issuer credit rating, you can make an educated guess of what it would be, and then add an appropriate premium to Rf. For example, if you guess the credit rating should be an A, the difference in the 25-year row of page 205 is 1.81 percentage points (4.62% - 2.81% for the Treasury). Take the Rf rate and add 1.81% to it for your estimate of Kd.