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25 Feb 2018

I need help with this problem i have. The company I chose was apple because i figured it would be the easiest. I know i listed the formulas, but i cant find any of the numbers. Can anyone possibly help? I need to know what numbers go in what formula.

Much appreciated.

Company Valuation

1. Analysis of WACC

a. Calculation of WACC for your company:

You will need to identify each component of the WACC formula and calculate the overall WACC.

The WACC formula for a company that uses debt and equity is as follows:

WACC = % Debt * Cost of Debt * (1 - Tax Rate) + % Equity * Cost of Equity

*You should use Yahoo! Finance and / or the company's most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement. Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, "Short/Current Long Term Debt")

Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)

% Debt = Debt / (Debt + Equity)

% Equity = 1 - % Debt

Cost of Debt = Interest Expense / Debt

Tax Rate = Income Tax Expense / Income Before Tax

Cost of Equity: Use the CAPM equation to calculate this

Cost of Equity = Risk free rate + Beta * (Market Risk Premium)

Risk free rate: look up the yield on 10 year US Treasury bonds

Beta: This is on the Key Statistics page in Yahoo! Finance

Market Risk Premium: Assume 11% minus the risk-free rate

b. Interpretation of WACC for Your Company

*Indicate what the WACC value you derived means for your company.

*What role does the WACC play for company managers when they are evaluating new projects to undertake?

*How would company managers and investors use the WACC for an overall company valuation analysis?

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Beverley Smith
Beverley SmithLv2
27 Feb 2018

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Use Yahoo finance to access financial statements of two of the following companies (your choice) United States Steel (symbol:X), Facebook (FB), Apple (AAPL),Citibank(C) and Walmart(WMT) for 2016 and answer the following questions for companies you have selected:

What is book value of the company?

How many outstanding shares the company has?

What is market value of the company on the last trading day?

What is the leverage ratio (total debt/equity) for the company? (Total debt = short term debt + long term debt)

What is risk free rate? How do you find it?

Use CAPM to calculate the cost of equity for the company, using the Beta provided by Yahoo. Assume market risk premium of 8%. (continued below)

Calculate the WACC for the company, using cost of debt = (interest expense)/(total debt)

What is the payout policy of the company?

What were the financing and investing activities of the company in 2016: capital expenditures, issuing stocks or borrowings, total dividend payout?

I need help proof reading my assignment please, thank you in advance.

Cost of Debt

The cost of debt is the effective rate that a company pays on its total debt.

As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing. This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.

1. Cost of debt (before tax) = Corporate Bond rate of company’s bond rating.

Pepsico 2.75% = 2.75%

Current cost of Debt as of February 17th 2014 = 2.75%

2. Current tax rate

In 2013 PepsiCo’s tax rate was = 23.66%

2013 PepsiCo averaged tax rate of 23.66%

3. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 – Tax Rate)

The effective rate that a company pays on its current debt after tax.

.0275 x (1 – .2366) = Cost of debt after tax

The cost of debt after tax for PepsiCo is 2.10%

Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return – Risk Free Rate)

The cost of equity is the return a firm theoretically pays to its equity investors to compensate for the risk they undertake by investing in their company.

Risk Free Rate = U.S. 10-year bond = 2.74%

Average Market Return 1950 – 2014 = 7%

Beta = PepsiCo’s Beta = 0.37

Risk Free Rate + Beta Equity (Average Market Return – Risk Free Rate)

2.74 + 0.37 (7- 2.74)

2.74 + 0.37 x 4.26

2.74 + 1.58 = 4.31%

Currently, PepsiCo’s has a Cost of Equity or R Equity of 4.31%, so investors should expect to get a return of 4.31% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.

Weighted Average Cost of Capital or WACC calculation

The WACC calculation is a calculation of a company’s cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.

As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk. By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances. For this calculation, you will need to know the following listed below:

Tax Rate = 23.66%

Cost of Debt (before tax) or R debt = 2.75%

Cost of Equity or R equity = 4.31%

Debt (Total Liabilities) for 2013 TTM or D = $53.069 billion

Stock Price = $78.09 (Feb. 17th, 2014)

Outstanding Shares = 1.55 billion

Equity = Stock price x Outstanding Shares or E = $121.04 billion

Debt + Equity or D+E = $174.109 billion

WACC = R = (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 – .2366) x .0275 x ($53.069 /$174.109) + .0431 ($121.04 /$174.109)

.7634x .0275 x .3048 + .0431 x .6972

.0064 + .03

= 3.64%

Based on the calculations above, we can conclude that PepsiCo pays 3.64% on every dollar that it finances, or 3.64% cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0673 plus the cost of the investment for the investment to be feasible for the company.

Understanding the WACC of a company is important because securities analysts employ WACC all the time when valuing and selecting investments. In discounted cash flow analysis, for instance, WACC is used as the discount rate applied to future cash flows for deriving a business’s net present value.

Investors use WACC as a tool to decide whether to invest. The WACC represents the minimum rate of return at which a company produces value for its investors. Let’s say a company produces a return of 20% and has a WACC of 11%. That means that for every dollar the company invests into capital, the company is creating nine cents of value. By contrast, if the company’s return is less than WACC, the company is shedding value, which indicates that investors should put their money elsewhere.

Assume that a company is expected to produce EBITDA of $90M in perpetuity. The corporate tax rate the company is subject to is 35%. To maintain the existing production capacities, capital expenditures are expected to be at $10M per year, in perpetuity. Annual depreciation, expected in perpetuity as well, is $10M. The current risk-free rate is 3%, and it is expected to remain so in perpetuity. The company has $200M in long-term debt, which is considered by the bank to be risk-free, so the interest rate the firm pays on its debt is 3%. The company expects to hold that amount of debt in perpetuity. Using stock returns on a comparable company that operates in the same industry, and has debt outstanding equal to 40% of the market value of its total capital, analysts estimated that the comparable company’s beta is 1.8. The analysts believe the companies are comparable in all respects except for the capital structure, and do not expect that beta to change over time. You also know that the estimate of the market risk premium for the foreseeable future is 5%. Assume that the probability of financial distress for the firm is negligible, so that you can disregard it.

What do you expect the value of the firm’s equity to be if the company were to issue new debt and use the proceeds from this debt issue to repurchase equity?

________________

What price would the firm repurchase the equity at, assuming the firm has 90K common shares outstanding?

__________________

Calculate the new, post-restructuring WACC.

*Note: I would assume the debt is 10m, that is another part that i am confused about*

The Value of an unlevered firm is 627.5 and levered 427.5 and WACC is 14.503% which were questions before this but with the same numbers.

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