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People's United Bank
The market value of People's United Financial (NASDAQ: PBCT) is $11.94 (current stock price) * 358.06 million shares outstanding = $4.275 billion. The book value of the debt is $19.802 billion. This gives People's United a total worth of $24.077 billion, weighted as 17.75% equity and 82.25% debt. The beta for the equity is 0.27. The risk free rate is 0.352% (Yahoo! Finance, 2011) and the traditional 7% market risk premium can be used. Using CAPM this gives a cost of equity of The cost of debt must also be calculated in order to determine the weighted average cost of capital of People's United. Being a retail financial institution, the vast majority of People's United's liabilities (90.5%) come in the form of deposits. Some of these pay no interest, and others pay out in savings, interest-bearing checking and money market accounts. Total interest expense for 2010 was $129.8 million on deposits of $17.933 billion, a rate of 0.72%. This is the cost of debt for People's...
The tax rate, estimated from the 2010 income statement, is 32.5%. The WACC formula (Investopedia, 2011) is as follows:
We (Ce) + Wd (Cd)(1-t)
(.1775)(2.242) + (.8225)(0.72)(1-.325)
0.398 + .399 = .7977 or 0.7977%
If People's United uses this WACC in its capital budgeting process, it is making a couple of key assumptions. The first is that the project being undertaken has the same risk as the company overall. The current WACC reflects, roughly, the risk level of the company's current operations. The project being analyzed, however, may have an entirely different risk profile.
Another assumption that People's United would be making is that the cost of debt in particular is valid. Financial institutions have unique balance sheets compared to other companies. The bank may or may not be able to raise more capital by increasing deposits -- the market is highly competitive and tapping this resource is not the same as…
Works Cited:
MSN Moneycentral. (2011). PBCT. Retrieved August 5, 2011 from http://investing.money.msn.com/investments/stock-price?symbol=U.S.%3aPBCT
Yahoo! Finance: Advanced bond screener. Retrieved August 5, 2011 from http://reports.finance.yahoo.com/z1?b=1&so=a&sf=m&tt=1&stt=-&pr=0&cpl=-1&cpu=-1&yl=-1&yu=-1&ytl=-1&ytu=-1&mtl=12&mtu=24&rl=-1&ru=-1&cll=-1
Investopedia. (2011). Weighted average cost of capital -- WACC. Investopedia. Retrieved August 5, 2011 from http://www.investopedia.com/terms/w/wacc.asp
People's United Financial 2010 Annual Report. Retrieved August 5, 2011 from https://www.peoples.com/pdf/PUFI_2010AR.pdf
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