Your Assignment is to calculate the weights (proportions) of debt and equity for your selected company
To prepare for this Assignment do the following For equity, you can use the market value of stock (number of shares times the current stock price).
For debt, you can use the book value of long term debt (from the balance sheet) While market values of debt are better, they are rather difficult to obtain Estimate the required rate of return on debt for your selected company The following are three possible approaches
a) You can use the credit rating provided by Standard & Poor's or Moody's. Use the ratings to find current yields above risk-free rates
b) Go to the FINRA Market Data website, located m this week's Learning Resources.
This will give the yield to maturity for EACH bond You need one measure of the cost of debt, so you will have to figure out an appropriate way to handle multiple debt issues
c) If your company does not have publicity traded debt (and/or both the previous two approaches did not work), you will need to read the footnotes to the annual report You may be able to get their estimated borrowing rate
After gathering the information
Submit a 1-page evaluation of the use of weighted aver.ige cost of capital (WACC) in the capital budgeting process, in your evaluation, do the following:
Estimate your company s weighted average cost of capital you can use me income statement information to estimate the tax rate - If your company uses this in the capital budgeting process (i.e. as the discount rate in NPV and IRR).
What assumptions are they making? Does your company face any particular difficulties in using this rate?
For example, does your company have different divisions or units that might have differing levels of risk?
Be sure to include any calculations you might have made, and describe which method you used find the required rate or return on debt for your company.