1.Use thebond price, yield-to-maturity, and quantity available you collected for each bond inComponent 2 for this project to estimate an average currentbond price and an average YTMfor all your company's bonds.Use the "weighted average" approach we discussed in class.
a. For the average bond price,usethe quantity available variableas a substitutefor theFMV tocalculate the weights.
b. For the average YTM(pre-tax cost of debt), use the product of the current price andquantity available from 1a as an estimate of FMV to calculate the weights.
2.Remembering that bond prices are quoted as a percent of par value and that the value ofbonds on the balance sheet are the par values, use your weighted average bond price fromquestion 1 to estimate theFMVof the company's outstanding bonds. For this question, youmust add the current portion of long-term debt to the long-term debt value to use as your parvalue.
If your balance sheet indicates a zero balance for preferred stock at the end of the most recent fiscal year, skip questions 3-4.
3.Go to the lookup page from Preferred-Stock to find as much publicly available information about your company'spreferred stocks as possible. Remember, you may need to try several shortened spellings ofyour company's name to find all of them. For eachpreferred stock issue you locate, click onthe symbol in the first column and record each share's latest price, number of shares (an "M"is used for "million"), and indicated annual dividend.Also, click on the IPO ProspectusSupplement to get the liquidation preference in the equivalent amount perdepositaryshare(to ensure consistency with the share price).
4.Use the information you collected in question 4 as follows.
a.Multiply the latest price by the number of shares to get the FMV of each issue. Add all these values together.
b.Multiply theindicated annual dividend by the number of shares to get total dividends topay.
Add all these values together.
c.Divide the sum in 4b by the sum in4a to estimate the average cost of preferred equity.
d.Multiply the liquidation preference by the number of shares to get a total liquidationpreference for each issue. Add all these values together.
e.Divide the sum in 4a by the sum in4b, then multiply this ratio by the value of preferredstock found in the statement of shareholders' equity to get an overall FMVfor yourcompany's referred stock.
5.Use the Capital Asset Pricing Model to estimate the cost of common equity.
a.Get the risk-free rate from the 3 month treasury yield onFINRA's bonds page.
b.Get the market return from the S&P 500 index. Use basic time value of money functions to calculate various estimates of the historical return using theclosing pricefrom the last date in your most recent fiscal yearas a future value and the followingolder prices as the present value:
i.Three months prior (n = 0.25)
ii.Twelve months prior (n = 1)
iii.Two years prior (n = 2)
iv.Three years prior (n = 3)
v.Five years prior (n = 5)
vi.Ten years prior (n = 10)
vii.The oldest price available, from January2, 1970 (use the YEARFRAC function inExcel to get n to two decimal places)
c.Getbeta by entering your company's ticker symbol in thesearch box at the top of theGoogleFinance home page.
d.Use each of the seven market returns as part of CAPM to estimate the company's cost of common equity. Do any patterns emerge? Are any of them close to the required returnyou calculated in question 7 of Component 2?
e.Now choose any of theeightreturns to use as your cost of equity. Justify this choice.
f.Also obtain the market capitalization from the same page where you found beta (a "B" is used for "billion") to estimate the FMV of common equity.
6.Calculate your company's weighted average cost of capital using the following seven itemsyou found earlierin thisproject:
a.The FMVs of debt, preferred stock, and common equity.
b.The costs of debt, preferred stock, and common equity.
c.The corporate tax rate(used in Component 1 to calculate after-tax operating income).