# Business Finance WACC project

BFIN

2201: Business Finance

Company Project

Complete

this assignment using the resources in the trading room and the information

given in your class notes. Follow all instructions given. Any time you see an X or instructions in bold, you should

replace them with the answer or state why the information is not available. Instructions

for how to embed an Excel Spreadsheet into a Word Document are at the end of the

document. Show all of your work. This project is worth 15% of your semester

grade. You can work in groups of 4.

Pick a

publicly traded company (You should NOT choose a bank or financial institution.)

Company

Chosen: EXXON MOBIL, ROYAL DUTCH SHELL, OR GENERAL ELECTRIC (choose one)

1) Find

the amount of long-term debt (D): Publicly

traded companies are required to produce annual accounting reports (10K) for

the SEC detailing the financial operations of the past year. On the balance

sheet, each company is required to list the value of long-term debt. (Note:

Most of the tables in this report are created by accountants. Hence, this

report provides book values. But, the book value of debt and the market value

of debt are roughly equal.) These can be found on the SEC EDGAR webpage.sec.gov/edgar.shtml”>www.sec.gov/edgar.shtml.

EDGAR stands for Electronic

Data-Gathering, Analysis, and Retrieval system. Click “Search for

Company Filings” then “Search by Company Name.”

Debt = X

2) Estimate

the cost of debt (rD): You can find bond information for current

bonds outstanding at the bond web page.nasdbondinfo.com/”>finra.org.

a) How

many different bonds does the company currently have outstanding?

Number of bonds = X

i) What

is the length of each bonds?

X

ii) Do

the bonds have any special features (puts, calls, sinking funds, etc)?

X

b) What

is the cost of debt of the most recently issued bond?

X

3) Find

the amount of equity (E):

a) What

is the book value of equity? This can be found in the annual 10K report.

Book Value of Equity = X

b) What

is the market value of equity? Several web pages list stock market information.

All of this information can also be

found on Bloomberg and Telemet using the terminals in the trading room. To find the information you need to find the

amount of equity look in the Equity Research Category in the Key Stats and

Company Financials Page. NOTE: Book equity and market equity are different!

Market Value of Equity = X

4) Estimate

the cost of equity (rE) two

different ways:

a) Dividend

Growth Model

i) What

is the current annual dividend (D0)?

On the Yahoo finance page follow the

link for “Historical Prices” and then “Dividends Only.” This table can be

exported into Excel to help you do calculations by clicking on “Download to Spreadsheet.”

Embed Excel Spreadsheet showing dividends for the last few years.

Current annual dividend = X

ii) Determine

the annual dividend for the past several years. Is there an approximate pattern

to the dividends? Are the dividends constant, growing, or uneven?

X

iii) If

the dividends grow over time, find dividend growth (g).

g = X

iv) Find

the current stock price (P0).

P0 = X

v) Using

the information above calculate the cost of equity using the constant dividend

model or the dividend growth model or state that neither one can be used.

Cost of Equity = X

b) Capital

Asset Pricing Model

i) Several

sources list ? including Telemet and Bloomberg. Find ? from 3 different

sources. State which source you used. Why are the betas different from

different sources?

Source 1 = X, ? = X

Source 2 = X, ? = X

Source 3 = X, ? = X

Reason why betas are different.

ii) Estimate

? yourself.

(1) Download

the historical stock price of your company and use them to calculate returns.

Embed Excel Spreadsheet with a few lines

showing.

(2) Download

the historical price of the S&P 500 index to use as an approximation of

market performance. Use the prices to find returns.

Embed Excel Spreadsheet with a few lines showing.

(3) Run

a regression in which returns of the company are the dependent variable and

S&P 500 index returns are the independent variable. Note: Your estimate of

? should be very similar to the ?s that you provided above. If it is very

different, you are doing something wrong.

Show regression results.

? = X

iii) Find

Rf. What is the risk-free

rate based on?

Rf= X

State the source of Rf

iv) You

can assume that Market Risk Premium is 6.1%. Using the information above,

calculate the cost of equity using the CAPM.

Cost of Equity =

5) What

is your company’s WACC?

Show the formula and numbers that you used to solve WACC.

WACC = X

6) The

company is considering a new project. At the end of the first year of the

project they could earn net operating cash flow of $1 million, $2 million the

following year and, $3 million in the last year. If the project requires an initial investment

(upfront cost) of $5 million, would you advise them to accept the project? Why?

X

7) The

company is considering a different project which could earn net operating cash

flows of $500,000 per year for the next 10 years. The project costs $4 million.

Would you advise them to accept the project? Why?

X

How to

Embed an Excel Spreadsheet into a Word Document

1. Open both the Word document and the Excel

spreadsheet

2. In Excel, copy the range of cells you want to include

3. In Word document position the cursor where you would like the table inserted

4. On the Home menu, select Paste then Paste Special…

.0/msohtmlclip1/01/clip_image002.jpg”>

5. Click the radio button beside Paste

.0/msohtmlclip1/01/clip_image003.jpg” alt=”http://0.tqn.com/d/wordprocessing/1/0/j/1/pastespecdb2.jpg”>

6. Under the label As:, select Microsoft Excel Worksheet Object

7. Click OK

Note:

Once embedded, the table size can be modified by double clicking on the embedded

table and dragging the edges.

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