Here are some, I hope helpful tips for the math involved in this sections.

DuPont-Make sure to use the five step not the three since it has t be the extended
DuPont equation: http://www.investopedia.com/articles/fundamental-
analysis/08/dupont-analysis.asp (Links to an external site.)

After tax cost of debt: http://www.accountingcoach.com/blog/after-tax-cost-of-

debt (Links to an external site.)

Cost of Preferred stock: http://www.investopedia.com/walkthrough/corporate-

finance/5/cost-capital/cost-debt-preferred.aspx (Links to an external site.)

Cost of Equity: http://www.investopedia.com/walkthrough/corporate-finance/5/cost-

capital/cost-equity.aspx (Links to an external site.)

CAPM model for cost of equity with

Excel: http://www.investopedia.com/ask/answers/022515/how-do-i-calculate-cost-
equity-using-excel.asp (Links to an external site.)

DCF Method: http://www.investopedia.com/university/dcf/dcf3.asp (Links to an

external site.)

WACC: http://www.investopedia.com/ask/answers/063014/what-formula-calculating-
weighted-average-cost-capital-wacc.asp (Links to an external site.)

As a side note WACC cannot be calculated until all other components have been
done,s o the sooner we get these numbers in the sooner that Mary can do the WAAC.
I had wanted to have it all complete by Friday, but I realize that you cannot do your
part Mary until we have all the numbers so if everyone has their portion in by Friday, I
think it will be easy for you to get your part done by Sunday morning at the latest.
From the looks of it, it is fairly easy once all the other numbers are done :)

Jennifer

Week 6 - WACC
Calculating WACC is probably the most challenging quantitative part of the
project. You need to calculate it for all 3 years. If it differs very much from
year to year, then you must make a decision as to what you think it will be
in future years.
 Here are some suggestions that may help:

COST OF DEBT:
For pre-tax cost of debt, divide interest expense on the income
statement by interest bearing debt on the balance sheet (short-term debt,
current installment of long-term debt, and long term debt).
For after-tax cost of debt, first divide provision for taxes on the income
statement by earnings before taxes to get the tax rate. Then multiply the
before tax rate by 1 minus the tax rate to get after-tax cost of debt.

COST OF EQUITY:
DCF approach: Estimate the growth rate and next annual dividend. You
can use the 5-year annual growth rate for g. A good source is
www.investing.com. (Toward the top, in the search box, input the stock
symbol for your company). Of course, if your company doesnt pay a
dividend, you cant use this approach.

CAPM approach: Use the long-term t-bond rate for the risk-free rate and
the S&P 500 index (or another index) returns for average return on the
market. Its okay to use the current beta for all years. A good source for
t-bond rates is http://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yield. A good source for the S&P 500 index
is http://www.1stock1.com/1stock1_141.htm.

You might want to supplement the DCF and CAPM with the companys (or
a similar company) long bond rate plus a premium.

Keep in mind that cost of equity will ALWAYS be higher than cost of debt or
preferred stock because the risk is greater. If cost of equity comes out
lower using these guidelines (usually because of net loss), use judgment
in determining cost of equity.

COST OF PREFERRED STOCK:

Most companies dont have preferred stock, but if they do:
Divide the annual dividend by the stock price
Cost of preferred stock isnt relevant if company doesnt have preferred
stock.

PUTTING IT ALL TOGETHER:

Determine the proportion of each capital component in the capital

structure, then
divide each component by total capital.
Multiply the proportion of each type of capital by its cost.
Combine to determine WACC.
Finally, determine the WACC you think should be used for upcoming capital
needs.
The above should at least give you a good start.

Lorraine