WACC Project (Prep week)
In order to complete the Final Major WACC Project by the due date in Week 10, students should have completed the following activities by the end of this week:
- Obtained the company's 10-K report containing key information, such as the overall corporate tax rate for use in the pre- and post-tax debt costs
- Determined the company's Beta coefficient from publicly available information and stock data on the company
- Determined an appropriate risk-free rate available from U.S. Treasury data posted each day on a website
- Begun work in determining the overall stock market rate of return, particularly by reviewing the work done by Professors Fama and French
- Determined the current market required rate of return on corporate bonds for a similar company as the one selected
- Determined if the company has any preferred stock
- Based on the existing level of debt, preferred stock, and common equity in the company, each student should be able to calculate or determine the company's current target ratio as decided by the chief financial officer (CFO) and other top-level corporate officials.
WACC Project (Prep week)
To complete the Final Major WACC Project by the due date in Week 10, students should have completed the following activities by the end of this week:
- Completed the analysis of their selected company's target cost of capital (WACC), based on the existing level of debt, preferred stock, and common equity in the capitalization structure
- Determined the appropriate risk-free rate of return, the Beta, the overall market rate of return, dividend payouts and historical payouts to determine the dividend growth rate, the corporate tax rate, and the current corporate bond rate for yield to maturity bonds
- Started calculating alternative WACCs as a function of varying amounts of debt in the capitalization structure.
WACC Project (Prep week)
To complete the Final Major WACC Project by the due date in Week 10, students should have completed the following activities by the end of this week:
- Completed the final WACC calculations for varying amounts of debt in the capitalization structure
- Graphed the U-shaped curve in Excel, indicating where the maximum (lowest) WACC lies, in terms of the amount of debt that should be used in the structure using Excel to graph, as well as the current target capitalization structure used by the company should be shown
Final Major WACC Project
Review the Final Major WACC Project 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 to have very small increments to show this.), something is wrong.
Format your final submission according to APA standards, and include reference and cover pages.