1. Calculate the Weighted Average Cost of Capital (WACC) for the company:
a. Cost of Debt
Determine the market value of the firm’s debt issues
. Be sure to review the firm’s 10-K. Also, the website http://finra-markets.morningstar.com/BondCenter may be of assistance.
You will need to calculate the firm’s composite YTM on its bonds. This can be achieved by calculating a weighted-average YTM for its bond issues.
After calculating the YTM for the bond issues, calculate the firm’s after-tax cost of debt. If the firm’s marginal tax rate cannot be identified in its 10-K, assume that the tax rate will be 35%.
b. Cost of Equity
i. Calculate the firm’s cost of equity using the capital asset pricing model (CAPM). The formula for the CAPM is ri = rf + βi × (RMkt – rf).
ii. Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds.
Calculate the market rate (
) by calculating the market return on the Standard & Poor’s 500 for the past 2 calendar years.
he beta for the firm can be obtained from Yahoo! Finance.
c. Calculate the WACC
Determine the market capitalization of the firm’s common equity and preferred equity, if any.
ii. Determine the firm’s capital structure based on the market value of the firm’s equity and debt. The market value of the firm’s debt can be obtained from the Morningstar website, listed in the Cost of Debt section above.
iii. Calculate the WACC.
As you recall, the formula for WACC is rWACC = E ÷ (E + D) rE + D ÷ (E + D) rD (1 – TC).