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Provide me with a memo detailing your calculation of your two companies' Weighted
Average Cost of Capital (WACC) (Chapter 13).
Equity
The Cost of Equity should be calculated three times: once using the Dividend Growth
Model and two times using the Securities Market Line model. Therefore, you will have
three estimates for WACC.
Dividend Growth Model (Chapter 9)
There are three required variables.
The Last Dividend and the Current Stock Price should be easy to determine.
The key variable is the Estimated Growth Rate. You should obtain the dividend
history for at least the last 12 quarters. Calculate the arithmetic and geometric
growth rates. Graph the dividends and visually judge if there is a discernible
pattern. Note that this analysis is backward looking whereas the proper use of this
model requires an estimate for the future dividend growth rate. If your analysis
suggests a pattern and there is no macroeconomic or business reason that this
pattern will not continue, then you can argue that the past is a reasonable estimate
of the future. Otherwise, you will need to research equity analysts' opinions and
probably need to construct a multistage growth model.
Securities Market Line (Chapter 7)
There are three required variables.
The Risk-Free Rate should be easy to determine.
The Market Risk Premium: use the historical average of 5.92% over the period
1926 through 2015
Betas are readily available on the internet; however, it is often difficult/impossible
to determine how they are calculated, i.e. what is the market (e.g., S&P 500) and
over what time frame. Obtain a Beta from the internet. Note the source, date and
time. If possible, determine how it was calculated, e.g., versus the S&P 500 using
weekly Wednesday data over the last 3 years.
Calculate Betas: Download your companies' daily stock price and an appropriate
market benchmark (e.g., the S&P 500) over the last 5 years. Note your source
(Yahoo Finance can be used) and date. You will use this data to calculate beta 3
different ways in Excel:
Using Formulas: calculate the returns, the standard deviation of the returns
and the correlation between the returns.
Using Functions: You should get the same answers as from your formulas
Calculate Beta:
Beta = correlation * (Std Dev of Company's Returns / Std Dev of Market Returns)
Calculate within a Chart:
Make an X-Y Scatter Chart of the data making sure that the Market
returns are on the X axis and the company's returns are on the Y axis.
Add a Trend Line (Chart Tools, Add Chart Element, Trend Line).
Right click the trend line on the chart, select Format Trendline,
Display Equation on Chart. The slope in the formula should be the
same as the Beta that you calculated using the Formulas/Functions
above. If they are not, double check your X and Y axes. If that is not
the problem then you should check your calculations.
Once you have this working, you need to repeat the process 8 more times
to complete the grid below:
Beta per Website:
Source:
Methodology:
Calculated Betas:
Daily
Weekly
Monthly
1 Year
3 Years
5 Years
Highest:
Lowest:
To get the weekly and monthly data you could go back to your source
(e.g., Yahoo Finance) and select weekly or monthly, or you could select
the data within your Excel spreadsheet. Use Wednesday for your weekly
data.
Comment on the results of your 9 calculations to each other and to the
Betas sourced via the internet.
Use your highest and lowest calculated Betas in your WACC calculation.
Copy-and-paste the grid into your memo.
Debt
The Cost of Debt requires you to calculate the weighted average yield (NOT coupon) of
the companies' long-term debt, usually bonds but may also include loans. The details of
the long-term debt should be available in a footnote to the financial statements. If you
are lucky, the footnote will give you the current yields and/or the current price (albeit as
of the fiscal year end) in addition to the amount, coupon rate and maturity dates.
Otherwise, you will need to research current yields and/or prices (from which you can
calculate yields).
Preferred Stock
The Cost of Preferred Stock (if any) requires two variables, Coupon Rate and Market
Price, both of which should be readily available.

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