You work in the corporate finance and treasury department and have just been assigned to the team estimating the company's WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly realize that the information you need is readily available online.
1. Go to the Yahoo! Finance website, http://finance.yahoo.com/ . Under "Market Data," you will find the yield to maturity for 10-year treasury bonds. Collect this number as your risk-free rate.
2. In the box, "Quote Lookup", type in the company's ticker symbol and press enter. Once you see the basic information, find and click on "Key Statistics". From the key statistics, collect the information for the company's market capitalization (its market value of equity), enterprise value (market-value equity + net debt) (note: enterprise value is the total market value of a firm's equity and debt, less the value of its cash and marketable securities), cash and beta.
3. To get the cost of debt, you will need the yield to maturity on the firm's existing long-term bonds. Go to the Financial Industry Regulatory Authority's website, www.finra.org , click on "Investors" and then, under "Market Data Center," click on "Bonds." Under "Search," click on "Corporate" and type in the ticker symbol. A list of the company's outstanding bond issues will appear. Find the yield to maturity for your chosen bond issue (i.e. close to 10 years from maturity) (it is in the column titled "Yield") and use this as your pre-tax cost of debt. (Note: If this information is not available or hard to obtain with FINRA then use as a reference, comparable companies with similar credit ratings.) 4. Compute the weights for equity and debt based on the market value of equity and market value of debt.
5. Calculate the company's cost of equity capital using the CAPM, the risk-free rate you collected, and a market risk premium of 5%. If the company has preferred shares, you will need to consider cost of preferred shares. 6. Assume that the company has a tax rate of 35%, calculate the effective (after-tax) cost of debt capital.
7. Calculate the company's WACC using the market value of equity and debt.
8. Calculate the company’s net debt by subtracting its cash (collected in step 2) from its debt. Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise value (note: enterprise value is the total market value of a firm's equity and debt, less the value of its cash and marketable securities). Recalculate the company's WACC using the weights based on the net debt. How much does it change?
9. How confident are you of your estimates in steps 7 and 8? Which implicit assumptions did you make during your data collection efforts?