(4) WEIGHTED AVERAGE COST OF CAPITAL (WACC):
Estimate the components of the cost of capital for your company using market data.
a) For the cost of common stock, analyze using the dividend growth model and
CAPM. To determine Beta, first use published sources. Next, calculate your own
beta estimate using regression analysis with 52 weeks of daily data. See the
textbook's website to download the regression tool kit from Chapter 6. If the
published estimates and the results of your regression analysis differ, justify your
final choice of Beta for the WACC determinations.
b) Calculate the cost of preferred stock
c) Calculate the cost of debt. Recall that you do NOT use the coupon rate, but instead use the YTM for each bond issue.
d) Determine the appropriate weights for each of the categories using market values.
e) Calculate the company's WACC.
f) In your opinion, has the company minimized its WACC? What could it differently?
Recall that more debt increases the risk of bankruptcy and more equity means the
flotation costs of issuing stock.
g) Provide reasons why or why not the current WACC is appropriate for future use by
the company. If not, explain which WACC should be used for future business
decisions.
(5) FUTURE CASH FLOWS:
Prepare a three (3) year forecast
of estimated future cash flows for you company and give valid economic/business reasons for your projections. This means you will have a statement of incremental cash flows. One year in the future, develop a future market value of equity and an estimated future price per share for the company's common stock.
Write a 1 page analysis, which incorporates marketing, accounting, sales, production, management, technology, etc. information into your estimates of future cash flows. Please cite 2-3 media sources for this analysis.
a) Perform a what-if analysis for your cash flows using at least one of the following: sensitivity analysis, scenario analysis, or simulation analysis. Also, provide a written summation of your what-if analysis.
b) Collect and evaluate information on inflation estimates and incorporate those estimates, as you see fit, into your cash flow estimates.
c) Comment on how future cash flows maybe be affected by information contained in the footnotes to the financial statements. Footnotes are often more interesting than the rest of the financial statements and provide valuable information.
d) Do a brief analysis of your competitors, the prospects of their future cash flows,
and how that affects your company's cash flows.
e) Conduct a "post-audit" of one (or more) of your company's major past projects and
incorporate this qualitatively into your estimates of future cash flows.