Assignment:
Review the guidelines for instructions on completing this assignment.
Consider the following simple rules of observation to help determine the final results:
- If the Beta coefficient and the required rate of return on common equity is not increasing constantly as the amount of debt in the structure moves from 0% to increasing levels of debt, something is wrong.
- If the cost of debt does not fall and then begin to increase as the risks of bankruptcy increase, something is wrong.
- If the WACC curve does not display some type of U-shaped form (Note: You may have to make the vertical percentage cost scale have very small increments to show this.), something is wrong.
Format your final submission according to APA standards, and include reference and cover pages.
Submit your project for grading.
Dear BSA 554 MBA 731,
In order that you may work ahead of time on the final WACC project for the course and tabs have been opened.
BSA 554 WACC Project Check-list:
For each section of the project please show all calculations and write a paragraph on what you have learned in completing each step of the project. This provides you an opportunity to explain your work in deriving the section's material.
Please note that the project must analyze a domestic-headquartered, publicly-traded corporation listed on the NYSE or on the NASDAQ. The firm must have long-term debt.
1. Determine the firm's rd from the 10-K report in the Note to the Long-term Debt, where rd = ∑(wdi*rdi), where wdi = the weight of debt for each bond and rdi is the coupon rate for each bond. Please regard equation a review of the methodology.
2. Construct the capital structure of the firm to find the wd and we components of the WACC. Note that the dollar amount of long-term debt and the dollar amount of total equity should be utilized. Preferred equity dollar amount should be included in the calculation if the firm still has preferred equity outstanding.
3. Find the firm's beta.
4. Determine the firm's tax rate from the 10-K information. Please make sure to include the page number where you determined the firm's tax rate in the 10-K report from the previous fiscal year.
5. Find either the 1-year Treasury bill rate or the 10-year Treasury note rate at the close of the firm's fiscal year. If the risk-free rate is provided by the firm in the 10-K, please utilize this percentage. Full credit will not be earned if the 4% rfr in the givens in the instructions is utilized.
6. Find an appropriate rm percentage for the previous fiscal year. Full credit will not be earned if the 8% rpm given in the instructions is utilized.
7. Construct the current CAPM rs for the firm.
8. Construct the current WACC for the firm. Note that you do not have to utilize the short-term debt portion in the equation.
9. Calculate the beta unlevered.
10. Calculate the new beta levered at plus or minus 5% or 10% intervals of wd in the firm's capital structure.
11. Determine the new rs CAPMs at each differing capital structure utilizing the new levered betas.
12. Make sure to adjust the rd by plus or minus the percentage of wd's change, so that a leverage increase of 5% should result in a new rd of (rd*1.05) and a leverage decrease of 5% should result in a new rd of (rd*0.95).
Please review the announcement that includes information on problems
13. Replicate rows 1 to 6 in figure on determine the capital structure where WACC is minimized.
14. Graph the WACCs at the different capital structures of the firm as stated in the instructions. Note that the WACC graph should be in a "U" shape.
15. Calculate the FCF utilizing Figure. Please show the calculations for steps 1 to 5.
16. Using a zero-growth valuation model of V^0 = FCF/WACC, determine the V^0 at the optimal capital structure.
17. Determine the estimated stock price per share utilizing Figure.
18. Review that stock price of the firm at the close of fiscal 2015. Compare the market price to the calculated intrinsic price, and make a recommendation on the stock. Support your recommendation with a stock chart and analysts' information.
The project is due by Sunday, March 26th. No late work will be accepted.