Part 1: Determination of WACC Using the principles and tools outlined in the textbook, form an estimate of the Weighted Average Cost of Capital (WACC) for the firm. In order to complete this task, you will need to do the following: Determine the cost of debt: Using information from the firm’s website, annual report, the website Investing in Bonds (link available in the Content area), and the library database sources, determine the ‘average’ rating of your firm’s bonds and the current YTM on a composite of these bonds. Based on this information, estimate the current cost of debt for the firm. Explain the approach and procedure you used to make your determination and what this number means. Determine the cost of equity: Determine the required rate of return for your firm using the CAPM. Explain the approach and procedure you used (and justification for the sources of inputs used for your model) to make your determination and the meaning of this required rate of return. Determine the capital structure of the firm: Determine the market value of the firm’s debt and equity. Explain the approach and procedure you used and use these values to determine the weights for the WACC. Finally, provide an overall explanation for your results and how the firm will use this WACC. There are resources available in the Content area that will help guide your determination of WACC.
Part 2: Stock Valuation
In chapter 9, we learned how the dividend-discount model can be used to determine the value of a firm’s equity, or the current price of a share of stock. Use this model to estimate the value of a share of your firm’s stock and compare this estimate to the current market value. To do this, you will need to do the following: Estimate the firm’s stock price using the dividend-discount model: Use an investment source (some have been provided in the Content area) and find: 1) the current dividend; 2) analyst’s estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firm’s historical growth rate or the formula “g=ROE x b”. Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM). Compare your result to the current market price of your firm’s stock. Provide analysis and an explanation of how they compare and explain any differences you observe.
The Company to use for this problem is the TJX Companies, Inc. (TJX)