Can you please help me with question 5 and 11. Note: I converted the bonds amount outstanding
Question:
Can you please help me with question 5 and 11.
Note: I converted the bonds amount outstanding numbers from thousands to millions, and I am unsure if we were supposed to do that. In addition, I have attached my calculations for reference.
Part 1: AAP's (Advance Auto Parts) Weighted Cost of Capital
5. To get AAP's cost of debt and the market value of its long-term debt, you will need the price and yield to maturity on the firm's existing long-term bonds. Go tohttp://finramarkets.morningstar.com/BondCenter/Default.jsp?, click "Search," click "Corporate," type AAP ticker "Show Results." A list of AAP's outstanding bond issues will appear.
Assume that APP's policy is to use the yield to maturity of its 10-year obligations as its cost of debt (or closest maturity). Find the bond issue that is as close to 10 years from maturity as possible. (Note: It is also best not to select a Callable Bond....)
Find the yield to maturity for your chosen bond issue (it is in the column titled "Yield") and enter that yield as your pretax cost of debt into your spreadsheet.
Next, copy and paste the data in the entire table of info listed for AAP the FINRA web pages into Excel. [For a quick way to do this, refer to Appendix 1]
11. Calculate AAP'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. Recalculate AAP's WACC using the weights based on the net debt. How much does it change?
Yield for 10-year Treasury bonds: | 3.9020% |
AAP's Market Capitalization: | |
Number of Shares Outstanding | 60.12 |
AAP's Current Stock Price | 171.44 |
AAP's Market Capitalization | 10,306.973 |
AAP's Cost of Equity Captal | |
Market Risk Premium (Given in the instructions) | 10% |
AAP Beta | 1.24 |
AAP's cost of equity using CAPM | 11.46352% |
AAP's cost of debt: | |
Total market value of AAP's debt: | 978.189 |
AAPs Market Capitalization | 10,306.973 |
Total Market Value (Debt + Equity) | 11,285.162 |
Weight of debt: | 0.0867 |
Weight of equity: | 0.9133 |
AAP's wiehted cost of equity: | 16.302% |
AAP's wiehted cost of Debt: | 6.638 |
AAP's WACC: | 15.34902828% |
AAP's effective cost of debt: | |
AAP's Cash: | 718,210 |
Net debt (Debt - Cash): | 2,491,492 |
Weight of debt: | 0.9959 |
Weight of equity: | 0.00407 |
AAP's WACC with net debt: | 5.35497650% |
a. How much does the WACC change if you use net debt versus the first method of calculation? | |
The difference between the net debt and the WACC is | 9.99405178% |
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill