Financial Analysis: Kohl’s

May 6, 2016
WACC Calculation:
a) Estimation of Cost of Debt:
For the purpose of calculation of cost of debt for the company, we have used the most recent debt issued by the company. Referring to note 2 of the financial statements, we found that during July, 2015, the company issued $650 million of 4.25% notes due in July 2025 and $450 million of 5.55% notes due in July 2045. (Kohl's, 2015) Accordingly, we used the average coupon rate of these two recently issued bonds to represent the cost of debt in the WACC formula. OK – I’ll go with that.
Average Coupon Rate:
= (4.25+5.55)/2
= 4.90%
Effective Tax Rate= Income Tax Expense/ Earnings before Tax
= 384/1057
= 36.32%
After Tax Cost of Debt= 0.0490*(1-0.3632)
= 3.12% OK, good.
Important to note, this after tax figure represent the cost of issuing bonds to the company. b) Estimation of Cost of Equity (CAPM Model) For the purpose of calculation of cost of equity, we relied on CAPM model as part of which, we used the risk-free rate for 10-year Treasury bill, while beta for the stock was sourced from Yahoo Finance. Additionally, and Market Premium was sourced from the database released by New York University. = Risk free rate+ beta (Market Premium) = 1.81+ 1.10(6) – I’d suggest 7%, but 6% is acceptable. = 8.41% We can go with this; however, and as I mentioned in the video, a 1-year T-bill rate is superior to a 10-year rate. The 1-year rate is about .50%. Using 7% as the premium and .50% as the risk-free rate, the cost of equity is 8.2%. Here:
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Risk-free rate= 10-year US treasury yield (CNBC, n.d.)
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Beta= Volatility of the stock to that of market index (Key Statistics: Kohls , n.d.)
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Market Premium= Excess of Market