For your Module 3 SLP assignment, continue to do research on the company that you wrote about for Modules 1 and 2. For this assignment, you will be estimating the weighted average cost of capital (WACC) for your chosen company. The final calculation will be fairly straightforward, as it involves just plugging in some numbers into an equation. However, the more challenging task will be finding the necessary numbers to plug into the formulas. You will need information such as the beta for your company, the bond-rating, and various information from its balance sheet. Links to some suggested Web pages for finding this kind of information is included in the instructions, but you might be able to find other sources of information. Go step by step and present your information for Steps 1-4 below in a Word document. Make sure to show all of your steps one by one and include the sources of your information:
Cost of Equity = risk-free rate + Beta * (Equity Premium).
Show your calculations. We will call the cost of equity RE.
Calculate WACC and show your computations. As a “reality check” on your calculations, the WACC should likely be in the single digits and positive. Compare what you found to the average WACC in your company’s industry, which should be available on Web pages such as Cost of Capital by Sector (US). Note that 35% is the official corporate tax rate, but many corporations find tax breaks. If your WACC is too low, try computing it with a lower tax rate such as 25% or 10%.
Start off the module by viewing these videos from Professor Roberts of the Wharton School of Business at the University of Pennsylvania and Professor Roberts of Rice University. These videos will give you a general overview of the key concepts of capital budgeting and the cost of capital:
Roberts, M. (2017). Decision criteria. Coursera. Retrieved from: https://zh.coursera.org/learn/wharton-finance/lecture/hRuBX/decision-criteria
Weston, J. (2017) Putting it all together as WACC (weighted average cost of capital). Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-finance/lecture/07ldB/putting-it-all-together-as-the-wacc-weighted-average-cost-of-capital
Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 8: Net present value and other investment criteria. Essentials of Corporate Finance. McGraw Hill. http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part5_Chap8.pdf [If the link is down, click Net Present Value or Fundamentals of Corporate Finance for an alternative link]
Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 12: Cost of capital. Essentials of Corporate Finance. McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part7_Chap12.pdf
[If the link is down, click Cost of Capital or Fundamentals of Corporate Finance for an alternative link]
Finally, check out the following video that will show you how to make capital budgeting calculations using Excel:
Graulich, V. (2012). How to calculate NPV and IRR. IHateMath.com. Retrieved from: https://www.youtube.com/watch?v=kCnwCplibAk&t=230s
Codible (2019). NPV and IRR in Excel 2010. Retrieved 08/19/2019 from https://www.youtube.com/watch?v=qAhV3xG0i8s
If you still have difficulty with the material after reviewing the required materials, check out the optional materials below. Included are two additional videos, including one on using Excel to compute NPV and IRR. Also included are some additional book chapters that cover the same material but explain it in a slightly different way with different examples.
BlueBookAcademy.com. (2015). Learn it FAST: Weighted average cost of capital explained. Retrieved from: https://www.youtube.com/watch?v=JIvokDfW9AQ&t=48s
Girvin, M. (2010). Investment criteria: NPV, IRR, payback, AAR, profitability index. Retrieved from: https://www.youtube.com/watch?v=U2aH4xH5Fz0
Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 14: Capital budgeting techniques. Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.
Clive, M. (2012). Chapter 14: The cost of capital. Financial management for non-financial managers. Kogan Page. Available in the Trident Online Library.
Block, S. & Hirt, G. (2008). Chapter 12: The capital budgeting decision. Foundations of Financial Management. McGraw-Hill, Retrieved from: http://studylib.net/doc/8149455/12-the-capital-budgeting-decision