Weighted average сost of сapital (WACC)
Thіs assignmеnt is an appliсatiоn of the weighted average сost of сapital (WACC).
Your instructor will allocate you a publicly listed company to analyse and report on. You are to complete the four tasks below and prepare a report.
You will be required to search for data as part of the assignment to find financial information such as the firm’s beta and the current risk free rate. You are encouraged to use Bloomberg terminal located at JCU Financial Lab to collect the information for your assignment. Alternatively, through the JCU library website you can access the Morningstar database (Datanalysis) which will assist you. Searching other websites such as the Reserve Bank of Australia is also required (rba.gov.au – go to the statistics link (top right hand side, click and choose Interest Rates und the Economic and Statistics Section). In all cases you must note where you obtained information from and the date of access as part of your referencing.
1. Calculate the Weighted Average Cost of Capital using an appropriate technique.
2. Explain your calculations and the judgements you made in arriving at your answer.
3. Calculate gearing ratios and describe any difficulties in doing so.
4. Analyse your findings with reference to capital structure theory.
5. Provide a recommendation to the Board on the firm’s current capital structure.
6.Provide a reflection on your work and your report.
In undertaking your reflection you should consider the following (Hint it is helpful to keep notes on your sources of information in addition to the ones you chose).
•What weights should we use when calculating the WACC, market value weights or accounting book values? To do this find the market value of equity (no. of shares times the share price) and the market value of financial debt (if no traded debt you may need to use accounting book values) then compare the weight calculations with those calculated using book values (shareholder funds plus total financial debt). Do they differ and what would you use/
•What risk free rate would you use – 30 day, 3 month, 6 month 1 year, 3 year, 10 year, of 30 year? Would it make a difference?
•Should you use a published beta such as that available on the Morning Star Data Base (DatAnalysis in the Library), calculate the beta yourself (you can get share prices and market indexes from Yahoo Finance), or pay someone to do it for you/
•Do you calculate a return on the market or use the spread between the market and the risk free rate (6% to 8% premium according to research).
•Do you use the debt expense as per the accounts or some indicator rate?