1. Use the bond price, yield-to-maturity, and quantity available you collected for each bond in Component 2 for this project to estimate an average current bond price and an average YTM for all your company’s bonds. Use the “weighted average” approach we discussed in class.
a. For the average bond price, use the quantity available variable as a substitute for the FMV to calculate the weights.
b. For the average YTM (pre-tax cost of debt), use the product of the current price and quantity available from 1a as an estimate of FMV to calculate the weights.
2. Remembering that bond prices are quoted as a percent of par value and that the value of bonds on the balance sheet are the par values, use your weighted average bond price from question 1 to estimate the FMV of the company’s outstanding bonds. For this question, you must add the current portion of long-term debt to the long-term debt value to use as your par value.
If your balance sheet indicates a zero balance for preferred stock at the end of the most recent fiscal year, skip questions 3–4.
3.Go to the lookup page from Preferred-Stock.com (https://www.preferred-stock.com/lookup.php) to find as much publicly available information about your company’s preferred stocks as possible. Remember, you may need to try several shortened spellings of your company’s name to find all of them. For each preferred stock issue you locate, click on the symbol in the first column and record each share’s latest price, number of shares (an “M”is used for “million”), and indicated annual dividend. Also, click on the IPO Prospectus Supplement to get the liquidation preference in the equivalent amount per depositary share (to ensure consistency with the share price).
4. Use the information you collected in question 4 as follows.
a. Multiply the latest price by the number of shares to get the FMV of each issue. Add all these values together.
b. Multiply the indicated annual dividend by the number of shares to get total dividends to pay.
Add all these values together.
c. Divide the sum in 4b by the sum in 4a to estimate the average cost of preferred equity.
d. Multiply the liquidation preference by the number of shares to get a total liquidation preference for each issue. Add all these values together.
e. Divide the sum in 4a by the sum in 4b, then multiply this ratio by the value of preferred stock found in the statement of shareholders’ equity to get an overall FMV for your company’s referred stock.
5. Use the Capital Asset Pricing Model to estimate the cost of common equity.
a. Get the risk-free rate from the 3 month treasury yield on FINRA’s bonds page.
b. Get the market return from the S&P 500 index (found here: https://www.google.com/finance?q=INDEXSP%3A.INX&ei=hsY5U-CYF4etqgG4Nw). Use basic time value of money functions (on your calculator orMBA508PROJECTCOMPONENT3WEIGHTEDAVERAGECOST OFCAPITALExcel) to calculate various estimates of the historical return using the closing price from the last date in your most recent fiscal year as a future value and the following older prices as the present value:
i. Three months prior (n = 0.25)
ii. Twelve months prior (n = 1)
iii. Two years prior (n = 2)
iv. Three years prior (n = 3)
v. Five years prior (n = 5)
vi. Ten years prior (n = 10)
vii. The oldest price available, from January 2, 1970 (use the YEARFRAC function in Excel to get n to two decimal places)
c.Get beta by entering your company’s ticker symbol in the search box at the top of the Google Finance home page.
d. Use each of the seven market returns as part of CAPM to estimate the company’s cost of common equity. Do any patterns emerge? Are any of them close to the required return you calculated in question 7 of Component 2?
e. Now choose any of the eight returns to use as your cost of equity. Justify this choice.
f. Also obtain the market capitalization from the same page where you found beta (a “B” is used for “billion”) to estimate the FMV of common equity.
6.Calculate your company’s weighted average cost of capital using the following seven items you found earlier in this project:
a. The FMVs of debt, preferred stock, and common equity.
b. The costs of debt, preferred stock, and common equity.
c. The corporate tax rate (used in Component 1 to calculate after-tax operating income).