Company Valuation
1. Analysis of WACC
a. Calculation of WACC for your company:Macdonald’s Corporation (MCD)
You will need to identify each component of the WACC formula and calculate the overall WACC.
The WACC formula for a company that uses debt and equity is as follows:
WACC = % Debt * Cost of Debt * (1 - Tax Rate) + % Equity * Cost of Equity
*You should use Yahoo! Finance and / or the company's most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement. Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, "Short/Current Long Term Debt") This has to be done in Microsoft excel.
Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)
% Debt = Debt / (Debt + Equity)
% Equity = 1 - % Debt
Cost of Debt = Interest Expense / Debt
Tax Rate = Income Tax Expense / Income Before Tax
Cost of Equity: Use the CAPM equation to calculate this
Cost of Equity = Risk free rate + Beta * (Market Risk Premium)
Risk free rate: look up the yield on 10 year US Treasury bonds 2.34
Beta: This is on the Key Statistics page in Yahoo! Finance
Market Risk Premium: Assume 11% minus the risk-free rate
b. Interpretation of WACC for Your Company
*Indicate what the WACC value you derived means for your company.
*What role does the WACC play for company managers when they are evaluating new projects to undertake?
*How would company managers and investors use the WACC for an overall company valuation analysis?