Business Finance WACC project

| September 28, 2018

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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