Problem $3$:

Please answer the question fully with all responses.

Estimate the most current Weighted Average Cost of Capital of Harley Davidson Inc $($ticker: HOG; CUSIP: $412822).$ Use CAPM to estimate the cost of equity. Assume that the capital structure $($the market debt$-$to$-$equity ratio$)$ observed as of the most recent annual financial statements remains in place forever for the company. Also assume that the market risk premium is $5\%$ and that the marginal tax rate is $21\%.$

Recipe:

a$)$ Calculate the cost of debt using most recent yields from a representative set of Harley Davidson public bonds.

b$)$ Calculate the market value of Harley Davidson debt using book value of debt adjusted by the price to face value multiple of a set of public bonds of Harley Davidson.

c$)$ The marginal tax rate is provided.

d$)$ Calculate the market value of equity using number of shares outstanding from the most recent financial report and historical stock price as of that date from NYSE, NASDAQ or Yahoo.

e$)$ Calculate the cost of equity using CAPM. For that, you are provided the market risk premium. Use current yield on the $10-$year Treasury bond as the risk$-$free rate, and calculate the beta of Harley Davidson stock using $5$ years $($that is$,60$ months$)$ of monthly stock returns and valueweighted $($VW$)$ CRSP portfolio as the market portfolio. Data on stock returns are provided in the Excel file obtained from the CRSP database $($column $F$ contains the monthly returns of Harley Davidson stock, column H contains monthly returns of the value$-$weighted CRSP portfolio of stocks, column J contains monthly returns of the S&P $500$ portfolio of stocks$).$

f$)$ Combine it all to calculate Weighted Average Cost of Capital $($WACC$)$ for Harley Davidson.

Suggested sources of the data:

SEC $\text{'}$s Edgar database $-$ for financial statements and annual or quarterly report $(10-$K or $10-Q$

Stock returns from CRSP database $-$ to calculate the beta.

FINRA's TRACE database $-$ for public bond yields and prices

U$.$S$.$ Treasury's web$-$site $-$ for T$-$bond rates

Yahoo's finance web$-$site,

NYSE.com or

NASDAQ.com $-$ for the stock price around the date of the most recent financial report.

To get to financial statements:

search Google for "sec edgar company filings"

in Company Lookup, search by the company name or ticket

select $10-k$ and $10-q$ reports $-$ view all $10-ks$ and $10-qs$

select "filing" of the respective report

select "interactive data" tab

"financial statements" tab takes you to Statements of Income $($Income Statement$)$ and Balance Sheets