COST OF CAPITAL ( WACC ) ESTIMATION - company ORACLE Here the goal is to calculate the
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COST OF CAPITAL WACC ESTIMATIONcompany ORACLE
Here the goal is to calculate the weightedaverage cost of capital WACC Relevant
inputs are the cost of equity, the cost of debt, the respective weights based on market
values and the tax rate faced by the company.
You may consult the slides from Week as a guide for the steps.
Specific Guidance:
For the cost of equity, you can use CAPM. For the riskfree rate, you may assume
it to be the yield on a year US government bond which you can look up online
please cite the source For the market premium, you may assume for simplicity
that it equals For the beta, you should do the unleveringandrelevering
procedure from the slides. You may use either the average or median unlevered
beta within the estimation. You may collect the initial beta estimates from anyDr. Nathaniel Light
online source such as Yahoo Finance or Investing.com, but please cite the source.
The betas for you firm and its peers should come from the same source.
For the cost of debt, please calculate a synthetic rating based on the method in
the slides. However, if you are able to find a yield quotation for a debt instrument
of the firm that has at least years to maturity, then you may use that yield in
your final WACC calculation instead.
For the weights, remember to be careful with units such as millions and billions!
Also see the slides for What counts as debt as a guide.
For the tax rate, you may either use the average of taxes pretax income of the
past few years, or else sometimes the firm itself will mention its own tax rate in
its financial statements.
In your report, you should briefly outline the steps and calculations, and show a
table or screenshot of the peer group unleveragingreleveraging technique. If you
use a yield quotation for the cost of debt, then you should also include a
screenshot.
With respect to the beta and overall cost of capital, does it make sense to you on
an intuitive level? That is if your firm has a high beta, can you explain why it
might be high risk? If a low beta, why low risk?
In your Excel file, your WACC calculations should be a separate tab, titled
WACC
Related Book For
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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