1. Analysis of WACC
a. Calculation of WACC for your company:Macdonald’s Corporation (MCD)
You will need to identify each component of the WACC formula and calculate the overall WACC.
The WACC formula for a company that uses debt and equity is as follows:
WACC = % Debt * Cost of Debt * (1 - Tax Rate) + % Equity * Cost of Equity
*You should use Yahoo! Finance and / or the company's most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement. Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, "Short/Current Long Term Debt") This has to be done in Microsoft excel.
Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)
% Debt = Debt / (Debt + Equity)
% Equity = 1 - % Debt
Cost of Debt = Interest Expense / Debt
Tax Rate = Income Tax Expense / Income Before Tax
Cost of Equity: Use the CAPM equation to calculate this
Cost of Equity = Risk free rate + Beta * (Market Risk Premium)
Risk free rate: look up the yield on 10 year US Treasury bonds 2.37
Beta: This is on the Key Statistics page in Yahoo! Finance
Market Risk Premium: Assume 11% minus the risk-free rate
b. Interpretation of WACC for Your Company
*Indicate what the WACC value you derived means for your company.
*What role does the WACC play for company managers when they are evaluating new projects to undertake?
*How would company managers and investors use the WACC for an overall company valuation analysis?
2. Calculate the intrinsic value of the company:
You will use the Discounted Cash Flow (DCF) Model to calculate the intrinsic value of your chosen company.
a. Calculate the free cash flow available to the firm. To do this you can use the formula below:
FCF = Cash Flow from Operations – Capital Expenditures + Interest * (1- Tax Rate)
The “Cash Flow from Operations” and “Capital Expenditures” can be found on the Statement of Cash Flows in Yahoo! Finance.
The interest expense (if any exists) is on the income Statement.
Tax rate should have been calculated above.
b. Specify the WACC – as calculated above. (You can go to thatswacc.com to check your answer, it does not need to be exact)
c. You can now calculate the present value of the firm. First you will need to specify a growth rate. To get an idea of an appropriate growth rate, you can utilize the PEG ratio listed on Yahoo! Finance (or any financial website).
PEG Ratio= PE Multiple / Growth Rate
Growth Rate = (PE Multiple / Peg Ratio)/100
d. Use the value of operations formula to calculate the value of operations:
Vop = [FCF(1+g)]/(WACC-g)]
Note: This equation will not work if your growth rate is greater than the WACC. If it is you will have to either a) select a lower growth rate for your company or b) calculate the present value of FCFs using the supernormal growth valuation we discussed in class.
e. Next, calculate the value of equity
Value of Equity =(Vop + Short Term Investments) – Value of Debt
Per share value = Value of Equity / # of Shares outstanding
f. Compare your calculated value to the current stock price.
- What might account for any difference between these two values?
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