Target's Cost of Capital Essay Example
When companies invest their money they need to earn a rate of return that exceeds their cost of capital. We can estimate a company’s cost of capital in the following way:
WACC = (rD)(1-T)(WD) + (rS)(WS)
Go to one of the databases from Part 1 of the Course Project and look up the most recent 10-K for your company, paying special attention to the balance sheet and the footnotes. Although we should use market value weights when determining a firm’s cost of capital, this may be difficult to determine for a firm with multiple bond/debt issues. Often times we can simply assume that the book value of the firm’s debt is a good proxy for the market value of the firm’s debt.
1. What is the date of this 10-K? 2008-03-13
2. What is the book (market) value of your company’s debt? [Note: Often times you can look at the footnotes to determine the average interest rate on your company’s debt.] $16,726,000,000
3. What is the average interest rate or cost (rD) for your company’s long-term debt? [Note: if you can not find interest rate information about your company, use the corporate rates table from the Yahoo Composite Bond Rates section from Part 1 of the project -- Question 14.] 3.3%
4. How many shares outstanding does your company have? 813,034,094
5. Using the price of your company’s common stock on April 18, 2008, determine the total market value of your company’s equity. $54.60
6. If the betas for your company that you found in Part 1 of the Course Project differ, then which beta will you use to determine your company’s cost of equity using the CAPM/SML, and why? There were three different betas from part 1 (0.6889, 0.77, 1.137). The highest value, 1.137, will be used to determine the company’s cost of equity because it will represent the worst case scenario for our calculations (i.e. a beta greater than 1.0 usually indicates a riskier stock).
Go to Course handouts on the class webpage and read the handout titled, “Equity Costs - Some
WACC = (rD)(1-T)(WD) + (rS)(WS)
Go to one of the databases from Part 1 of the Course Project and look up the most recent 10-K for your company, paying special attention to the balance sheet and the footnotes. Although we should use market value weights when determining a firm’s cost of capital, this may be difficult to determine for a firm with multiple bond/debt issues. Often times we can simply assume that the book value of the firm’s debt is a good proxy for the market value of the firm’s debt.
1. What is the date of this 10-K? 2008-03-13
2. What is the book (market) value of your company’s debt? [Note: Often times you can look at the footnotes to determine the average interest rate on your company’s debt.] $16,726,000,000
3. What is the average interest rate or cost (rD) for your company’s long-term debt? [Note: if you can not find interest rate information about your company, use the corporate rates table from the Yahoo Composite Bond Rates section from Part 1 of the project -- Question 14.] 3.3%
4. How many shares outstanding does your company have? 813,034,094
5. Using the price of your company’s common stock on April 18, 2008, determine the total market value of your company’s equity. $54.60
6. If the betas for your company that you found in Part 1 of the Course Project differ, then which beta will you use to determine your company’s cost of equity using the CAPM/SML, and why? There were three different betas from part 1 (0.6889, 0.77, 1.137). The highest value, 1.137, will be used to determine the company’s cost of equity because it will represent the worst case scenario for our calculations (i.e. a beta greater than 1.0 usually indicates a riskier stock).
Go to Course handouts on the class webpage and read the handout titled, “Equity Costs - Some