Select a publicly traded company from Yahoo Finance (or another financial research web site of your choice). Create your own Excel model (based on the principles shown in the text book as well your own prior course work) to complete the following tasks:
1. Calculate the weighted average cost of capital [WACC] of the firm (identifying and enumerating the capital sources, their respective cost, and mix);
2. List and explain what you believe are the underlying risk factors that justify or clarify the basis for the individual cost of each of the capital sources (e.g., the specific financial and liquidity risks associated with the debt, specific operational and business risks associated with the equity). If for example you were examining an airline company, operating and business risk factors might include but not be limited to energy costs, revenue per passenger miles, seating capacity utilization rates and so forth. For its financial risk, the airline’s net free cash flow in relation to its fixed charges [principal plus interest] under different economic scenarios (optimistic, middle-of-the road and pessimistic) is helpful in determining risk exposure.
3. If you were to use most recent Cash from Operations and the WACC you calculated in #1, what is the implied Horizon or Terminal Value? What is the implied Horizon or Terminal Value if you were to use Net Free Cash Flow? [Note: Net Free Cash Flow = Cash from Operations MINUS Cash from Investing MINUS Cash from Financing]
4. Which of these values do you believe is most accurate in valuing the enterprise? Explain your reasoning.