Part 1: WACC Calculation
Using concepts learned during the class, estimate the weighted average cost of capital (WACC) for your company. The process involves several key steps:
Estimate beta for your company using regression analysis. Estimate beta using daily prices for past one year, weekly prices for the past two years, and monthly prices using the past five years. Do you get different beta using three approaches? Why? Which beta is the most appropriate beta for your company? Explain your reasoning in the excel document itself.
Estimate the cost of equity by employing the Capital Asset Pricing Model (CAPM), factoring in your company’s appropriate beta. Utilize an appropriate risk-free rate and a market risk premium of 6% for your calculation.
Estimate the appropriate cost of debt for your company. You can use different approaches to estimate cost of debt.
Credit rating and Yield-spreads.
If credit rating is missing, find rating of firms in the same industry and similar size.
Adjust for expectations of changes in the future interest rates based on your economic analysis.
Explain your analysis in the excel document.
Determine the capital structure weights of equity and debt based on the current market values of equity and debt. This involves calculating the proportion of total capital represented by equity and debt.
By meticulously completing these steps, you’ll arrive at a comprehensive understanding of your company’s WACC, a vital metric used in investment decision-making and capital budgeting.
Part II: Pro-forma statements
Select the appropriate explicit forecast period for your company, ensuring it spans a minimum of 5 years and a maximum of 10 years. Utilize this chosen forecast period to estimate pro forma income statements and balance sheets for your company for the upcoming 5 to 10 years.
Part III: Free cash flow estimation and discounted cash flow valuation
As discussed in class, estimate free cash flow to firm and free cash flow to equity for your company. Using WACC estimates in part-I, estimate fair value of stock using discounted cash flow methodology. Which of the two approaches (FCFE vs FCF) is suitable for your firm? why?
Deliverable: Submit an Excel spreadsheet containing all pertinent details. Format the spreadsheet to enhance clarity and ease of understanding. Explicitly state the basic assumptions underlying your estimates for transparency and coherence. Use your excel to explicitly state your major assumptions and rationale for these assumptions.
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