Capital Budgeting For A Business Assignments | Online Homework Help
Need helping to answer short questions concerning business, concerning capital budgeting. APA format, reference, title page and citations
For your Module 3 SLP assignment, continue to do research on the company that you wrote about for Modules 1 and 2. For this assignment, you will be estimating the weighted average cost of capital (WACC) for your chosen company. The final calculation will be fairly straightforward, as it involves just plugging in some numbers into an equation. However, the more challenging task will be finding the necessary numbers to plug into the formulas. You will need information such as the beta for your company, the bond-rating, and various information from its balance sheet. Links to some suggested Web pages for finding this kind of information is included in the instructions, but you might be able to find other sources of information. Go step by step and present your information for Steps 1-4 below in a Word document. Make sure to show all of your steps one by one and include the sources of your information:
- Find out your chosen company’s credit rating. Rating agencies such as Moody’s and Standard and Poor’s assign ratings to companies. AAA is high, AA is lower, BBB is even lower, etc. The higher the rating, the lower the cost of debt capital. Explain what your company’s credit rating is and the reasons for the high or low rating based on your research. Also, use the Fidelity Fixed IncomeWeb page to find out what the current return is for a 30-year bond for a corporation with the rating that your company has. This yield will be the approximate cost of debt capital for your company. We will call the cost of debt RD.
- Now estimate the cost of equity for your company. First, you will need the beta; you already found this for your Module 1 SLP. You will also need the three-month Treasury bill yield, which we will use as our measure of the risk-free rate. This rate should be listed on the Fidelity Fixed Income Web page linked above. Finally, you will need the equity risk premium. You can find estimates of this on many Web pages including fidelity Fixed Income or Gutenberg Research. It is usually around 5%. Once you have this information, you can estimate the cost of equity as the 30-year treasury bill yield rate plus beta multiplied by the equity premium:
Cost of Equity = risk-free rate + Beta * (Equity Premium).
Show your calculations. We will call the cost of equity RE.
- Now find out how much of the firm’s capital is equity and how much is debt. For the total value, look at the balance sheet for your company as found on Google Finance or a similar Web page. The total value of your company will be “total liabilities and shareholder’s equity.” The proportion of debt will be total liabilities divided by total value, which we will call D/V. The proportion of equity will be shareholder’s equity divided by total value, or E/V. If you calculate them correctly, the proportions will add up to one.
- Now we have all the information we need to get at least a rough ballpark estimate of WACC. Let’s assume a corporate tax rate of 35%. So the formula we will use is WACC = (E/V)* RE+(D/V)* RD *(1-.35)
Calculate WACC and show your computations. As a “reality check” on your calculations, the WACC should likely be in the single digits and positive. Compare what you found to the average WACC in your company’s industry, which should be available on Web pages such as Cost of Capital by Sector (US). Note that 35% is the official corporate tax rate, but many corporations find tax breaks. If your WACC is too low, try computing it with a lower tax rate such as 25% or 10%.
Start off the module by viewing these videos from Professor Roberts of the Wharton School of Business at the University of Pennsylvania and Professor Roberts of Rice University. These videos will give you a general overview of the key concepts of capital budgeting and the cost of capital:
Roberts, M. (2017). Decision criteria. Coursera. Retrieved from: https://zh.coursera.org/learn/wharton-finance/lecture/hRuBX/decision-criteria
Weston, J. (2017) Putting it all together as WACC (weighted average cost of capital). Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-finance/lecture/07ldB/putting-it-all-together-as-the-wacc-weighted-average-cost-of-capital
Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 8: Net present value and other investment criteria. Essentials of Corporate Finance. McGraw Hill. http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part5_Chap8.pdf [If the link is down, click Net Present Value or Fundamentals of Corporate Finance for an alternative link]
Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 12: Cost of capital. Essentials of Corporate Finance. McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part7_Chap12.pdf
[If the link is down, click Cost of Capital or Fundamentals of Corporate Finance for an alternative link]
Finally, check out the following video that will show you how to make capital budgeting calculations using Excel:
Graulich, V. (2012). How to calculate NPV and IRR. IHateMath.com. Retrieved from: https://www.youtube.com/watch?v=kCnwCplibAk&t=230s
Hamilton, K. (2014). Excel NPV IRR. Retrieved from: https://www.youtube.com/watch?v=HTJh5yxphMs