Finance

FIN630 HW5

 Cost of Capital

To
complete this assignment, you must estimate a cost of capital for your company.
  Please submit a spreadsheet with all
your calculations clearly indicated.  There
are many steps required as described below.

Cost
of debt

1. Check to see if your company (Pepsi Company) is
   rated by Moody’s by going to their website. 
   (Registration required.) Another less focused approach is to just type
   in the name of the company and “bond rating” in a Google search and see what
   comes up.
2. Estimate
   a synthetic rating for your company.
   1. For firms without a rating, this will be your
      primary basis for estimating the cost of debt. For firms with an actual rating,
      it will give you a basis for comparison. You can continue to use the actual
      rating, but be aware of the synthetic rating as well.
   1. You can use the Synthetic Rating spreadsheet to
      do the computation, or you can do it by hand.
   1. You will need some data for this:
      1. Get the raw data on interest bearing debt: In
         particular, take a look at the balance sheet and identify the interest-bearing
         debt.  Include bank loans and corporate
         bonds, short term and long-term debt. 
         Don’t include things like accrued income tax.  For ambiguous items, such as “long term
         liabilities”, you will have to make the judgment.  Read the notes to the financial statements and
         decide whether it meets the definition of debt we discussed in class.  (It is possible that your firm has no debt.
         Don’t pull your hair out looking for something that does not exist. A clue that
         your firm has no debt will be in your income statement if your interest
         expenses are zero). 
      1. Collect operating lease data: For US companies,
         the lease commitments (if any) should be in a footnote in your financial
         statements. The current year’s lease payment will also be reported close
         by.  Again, note that not all companies
         have lease commitments. 
3. Convert
   your bond rating (either actual or synthetic) to a pre-tax cost of debt. 

Market
Value of Debt and Equity

1. For interest bearing debt in part 2, estimate the
   average time until the debt is due (the “maturity” of the debt) and then
   pretend that the debt is a coupon bond with a coupon payment equal to the
   current interest expense and a face value equal to the book value of the debt.
   Use the cost of debt to calculate a present value.
   1. For
      lease commitments, calculate the present value of the future lease commitments,
      again at the cost of debt. 
   1. If your
      firm has other long-term commitments noted in the annual report, include those
      as well.  (For example, Netflix’s content
      agreements require future payments with a present value of over 20% of the
      value of the company.)
2. Estimate
   the market value of the equity of your company. 
   (Look at the market price per share and the number of shares
   outstanding.)  If your company has
   multiple share classes, be sure to include the total value of all of them.  If your company has large amounts of employee
   stock options or convertible debt, see me.

Tax
Rate

1. Get a
   marginal tax rate to use on your cost of debt. In the US, this is currently 21%.
   In other countries, the number is lower. See the kpmg.com link I provided on
   Blackboard. 

Cost
of Equity

1. Start
   with the unlevered beta you estimated in the previous homework.
2. Compute
   the levered bottom-up beta for your
   firm.  (You estimated all the other
   pieces earlier in this homework.
3. Get
   an estimate of the risk-free rate.
4. Estimate
   the Market Risk Premium.  (If your company
   operates internationally, this might contain an adjustment for emerging market
   risk.)
5. Estimate
   the cost of equity.

Cost of Capital

1. Estimate
   the cost of capital for your firm.  (If
   your firm has preferred stock, you should deal with it as well.  It will not take long; see me for details.)

 

“Looking for a Similar Assignment? Order now and Get 10% Discount! Use Code “Newclient”

The post Finance appeared first on Top Grade Professors.