Use chapter 12 Finance Matters: Cost of Capital Texas Style on page 401 404 as a guide to do this part of the project Go to Yahoo Finance ( link: http://finance.yahoo.com ) and look for the stock information for the company using the company name or its ticker ABT Remember that you can also find a lot of information under the Key Statistics section in the companys page in Yahoo Finance. There is also a direct link to Secs Edgar. Here is an example with Apple. Answer the following questions for Abbott Laboratories (In a table format in excel): a. What is the most recent stock price listed (add the date) b. How many shares does the company have outstanding? c. What is the market value of the equity or market capitalization? d. What is the most recent dividend paid e. What is the stocks Beta f. On Yahoo!, go to the bonds section. Using the following link: http://finance.yahoo.com/bonds What is the 3-month Treasury Bill Yield? g. Assuming a market risk premium of 7% (check out chapter 10 for statistics behind this number), calculate the cost of equity using CAPM model. h. Calculate the cost of equity using the dividend discount model. (Go to SEC Edgar and look at the last 10-K report. Look at dividends paid for the historical periods reported and calculate the dividend growth rate. Can you calculate the cost of equity using this method? i. What is the cost of capital using questions g and h above. j. You need to calculate the cost of debt for the Company. Go to Yahoo! 's bond center screener using the following link https://screener.finance.yahoo.com/bonds.html , (an other way is to enter enter the bond screener section via the bond center look at the screen shot below. However it is easier with the link). Once inside the bond screener check the corporate bond option and press find You can sort bonds based on different categories, which are displayed by columns. You want to click on the Issue category to sort by company name. That way you can look for all the bonds issued by the Company. In a table!, write the bonds characteristics, including yield to maturity or each bond outstanding. (See table in excel file provided. k. Go to SEC and search for the most recent 10-K report for the company. Under the tabs notes to financial statements and/or tables for financial statements look for the detailed information related to the debt of the company. (Typically under the Notes to Financial statements under debt and lines of credit) What is the book value of the debt? How may bonds were issued? Assume that each bond has a face value of $1000 (Unless otherwise stated in the financial information for the company. {Note: Sometimes when you download this info onto excel it does not display properly. I recommend looking at the electronic version of the filing to obtain this information) l. Calculate the weighted average cost of debt both using Book Value and Market Value and compare. What effect would using one over the other have when you calculate the cost of debt? (Note in the case of bank debt use the book value of the debt for both calculations) Also assume that the bonds with 2%, 2.55% and 2.95% coupons are trading at par and their YTM is equal to the coupon rate. For the rest of the bonds use the market info from the Yahoo Bond screener. For the Short Term Debt assume that it has rate of 1%. m. You now have the necessary information to calculate the WACC of the Company. Calculate it using Book Value weights and Market weights and compare. Part 3 (15 points) You are hired by Abbott to see if their new project is worthwhile or not in a 5 year period timeline. Abbott is considering the sale of a new drug represent an increase in sales of .25% over their last year-end figures. In order to do so, they would need to invest $15,000,000 on equipment and $5,000,000 on Research and Development only on year 0. The investment would depreciate in 7 years (use MACRS schedule Table 9-7). After the 5 years, only part of their investment can be sold for $ 5,000,000. Net Working Capital to start will be 500,000 and then it will be a 10% of the Increase in Sales {Remember that on year 5, the NWC is the recovery of all NWC the company still has/or has invested in the project} Down load form SEC- Edgar the last 10-K report and: a. Estimate the Revenues for the stand-alone (only the project and not for the whole company) for the next 5 years. After the 1st year revenues are expected to grow at a 5%/year. b. Estimate the costs of your project. A good proxy would be to use the same proportion of Costs of Products Sold and Selling General Administrative Expenses to Sales of the Company as a whole. (look at the last 10-K report and calculate the common size income statement to look at the costs as a % of sales. Apply the same % to calculate the costs of your project). c. Calculate the EBIT for the next 5 years for the project. d. Calculate the companys Marginal Tax rate for 2015 (Use table 2.4 from your book as reference) and calculate the average tax rate. Use the smaller of the 2 to calculate the tax effect on your operating cash flows. e. Calculate operating and the total cash flows. f. Using the WACC calculated in Part 1, calculate the projects NPV and IRR. Is this something that should be perused? What is the relationship between IRR and WACC? What do these numbers tell you. g. What happens if you missed your cost estimate by +10% or -10% of your initial estimate? What is the NPV and IRR of your project. HINT: For reference use Chapter 9 work sheet- MACRS tab. This will guide you through the process) Remember that ABBOTTs figures are listed in millions so you need to adjust to dollars to calculate your cash flows (ie need to multiply by 1,000,000)