Part 1: WACC Calculation
Using concepts learned during the class, estimate the weighted average cost of capital (WACC) for your company. The process involves several key steps:
- Cost of Equity Calculation using CAPM Model:
- Estimate beta for your company using regression analysis. Estimate beta using daily prices for past one year, weekly prices for the past two years, and monthly prices using the past five years. Do you get different beta using three approaches? Why? Which beta is the most appropriate beta for your company? Explain your reasoning in the excel document itself.
- Estimate the cost of equity by employing the Capital Asset Pricing Model (CAPM), factoring in your company’s appropriate beta. Utilize an appropriate risk-free rate and a market risk premium of 6% for your calculation.
- Cost of Debt Estimation:
- Estimate the appropriate cost of debt for your company. You can use different approaches to estimate cost of debt.
- Credit rating and Yield-spreads.
- If credit rating is missing, find rating of firms in the same industry and similar size.
- Adjust for expectations of changes in the future interest rates based on your economic analysis.
- Explain your analysis in the excel document.
- Estimate the appropriate cost of debt for your company. You can use different approaches to estimate cost of debt.
- Capital Structure Weight Calculation:
- Determine the capital structure weights of equity and debt based on the current market values of equity and debt. This involves calculating the proportion of total capital represented by equity and debt.
By meticulously completing these steps, you’ll arrive at a comprehensive understanding of your company’s WACC, a vital metric used in investment decision-making and capital budgeting.
Part 1: WACC Calculation
Using concepts learned during the class, estimate the weighted average cost of capital (WACC) for your company. The process involves several key steps:
- Cost of Equity Calculation using CAPM Model:
- Estimate beta for your company using regression analysis. Estimate beta using daily prices for past one year, weekly prices for the past two years, and monthly prices using the past five years. Do you get different beta using three approaches? Why? Which beta is the most appropriate beta for your company? Explain your reasoning in the excel document itself.
- Estimate the cost of equity by employing the Capital Asset Pricing Model (CAPM), factoring in your company’s appropriate beta. Utilize an appropriate risk-free rate and a market risk premium of 6% for your calculation.
- Cost of Debt Estimation:
- Estimate the appropriate cost of debt for your company. You can use different approaches to estimate cost of debt.
- Credit rating and Yield-spreads.
- If credit rating is missing, find rating of firms in the same industry and similar size.
- Adjust for expectations of changes in the future interest rates based on your economic analysis.
- Explain your analysis in the excel document.
- Estimate the appropriate cost of debt for your company. You can use different approaches to estimate cost of debt.
- Capital Structure Weight Calculation:
- Determine the capital structure weights of equity and debt based on the current market values of equity and debt. This involves calculating the proportion of total capital represented by equity and debt.
By meticulously completing these steps, you’ll arrive at a comprehensive understanding of your company’s WACC, a vital metric used in investment decision-making and capital budgeting.