Fin 502 Managerial Finance

Andras Fekete

PNC’s Weighted Average Cost of Capital

Case 5

Due: November 6th, 2006

Prepared for Dr. James Haskins

Managerial finance

November 5, 2006

TABLE OF CONTENTS

List of Figures 3

List of Tables 4

Executive Summary 5

Introduction 6

Statement of Opportunities and Problems 7

Methodology and Analysis 8

Summary and Conclusions 24

Recommendations 25

Works Cited 27

Appendix 28

LIST OF FIGURES

Figure 1: NPC’s yield curve 10

Figure 2: Project evaluation 10
LIST OF TABLES

Table 1: Bond yield and cost of debt 9

Table 2: Sinking fund cash flow 11

Table 3: Own-bond-yiel-plus-risk-premium 12

Table 4: Cost of Equity, CAPM 14

Table 5: Cost of Equity, DCF 15

Table 6: Issuance of new common stock 18

Table 7: PNC’s WACC 18

Table 8: Capital budget 19

Table 9: Project evaluation 20

Table 10: Capital structure (weights) 21

Table 11: Capital structure (costs) 21

Table 12: Euro-denominated bonds 22

Executive Summary

The cost of capital consists of three parts: cost of debt, preferred stock, and common equity. For bond evaluation we find the yield on the bonds and deduct the taxes, for preferred stock we consider the dividends and flotation costs and for cost of equity there are three different ways to estimate that is described in this report. For PNC the best is to use CAPM, because it considers market risk and that makes more informative to investors. To obtain the cost of weighted average cost of capital we multiply the cost of the above components with the desired weight. The heavier the weight is in certain component the bigger part it finances of the capital budget, and the closer the cost of capital to the cost of the particular component.