Second project overview and implementation

Financial Concepts

Your calculated WACC. ( Market value of equity and debt are given in thousands)

Risk-Free Rate

Beta

Expected return on the market

Credit Spread

Market value of equity

Market value of debt

Marginal Tax Rate

Percentage of Debt

in capital structure

Percentage of Equity

in capital structure

Cost of Equity = 8.80%

Capital Asset Pricing Model Formula (Cost of Equity)

RF + Beta (Market Risk Premium)

Cost of Debt Formula

Risk Free Rate + Credit Spread

Cost of Debt= 5.0%

Weighted Average Cost of Capital (WACC)

Cost of debt (1- tax rate) * Percentage of debt + Cost of Equity* Percentage of equity

How data was used to calculate WACC. This would be the formula and the formula with your values substituted.

WACC = (E/E+D) rE + D/(E+D) rD (1-TC)

(5% * (1- .4)) * 14.29% + (8.80%* 85.71%) = 7.971%

Sources for your data

Sources of the WACC are found in annual reports and other sec filings. The WACC is used as a mechanism to discount free cash flows or to derive the cost of money for a particular firm. The WACC is very sensitive to changes in the overall estimates used. A 100 basis point change could ultimately result in overly optimistic or pessimistic valuation. It is therefore, paramount to arrive a figure the best reflects the economic reality of the firm. To accomplish this task, the overall sources of data should look over a business cycle to arrive at the appropriate cost of debt and cost of equity. Annual reports, 10-K, and the 10-Q, are all sources I used to compile the necessary data. By dividing tax expense by EBT, an appropriate The information contained in these filings details the overall cost of debt for the firm.

The cost of equity is somewhat more complicated as beta typically relies on the most recent stock price information. Beta should be adjusted to reflect the performance of company over a business cycle. The sources I used for historical beta are Yahoo Finance, and Morningstar. For a historical perspective of an equity risk premium an appropriate source can be obtained through Dimson, Marsh, and Staunton (2008), Tables 10, 11.

4. A discussion of how much confidence you have in your answer. What were the limiting assumptions that you made, if any