# Wacc Project

Submitted By aliknow
Words 944
Pages 4
WACC Project
On Amazon
Due Date: January 16, 2016
Name:
Professor

Finding the weighted average cost of capital for Amazon.com
Ticker: AMNZ
Amazon is an American publically traded company and is one of the largest retailing firms headquartered in Seattle, Washington. The reason why I chose this firm is that it has equity, debt and lease payments in its capital structure. The following are the calculations performed in order to determine the WACC for the firm. Cost of debt
According to Moody’s report for year 2014, the credit rating of Baa1 reflects excellent liquidity and financial policy for the shareholders (Moody, 2014). Even though the article reflected it to be a positive sign for the firm, still the rating is quiet low.
Based on the financial statements of Amazon.com, if the firm has good credit ratings it must add 0.625% to the LIBOR rate in order to derive the cost of debt and if the rating is poor it must add 1% to the LIBOR rate (Amazon, 2014). I presume the credit rating to be extremely low so adopting a conservative approach, I have rather added 2% to the rate:
The cost of debt for Amazon.com therefore is:
KD= RF + spread KD= 0.561% + 2%
KD = 2.561%
For Amazon.com, the interest rate is the function of LIBOR rate so the book value approximately equals the market value. The estimated fair value of long-term debt is \$9.981 billion (\$9.1 billion for notes and \$881 million for other long-term debt) as stated in the note 6 to the financial statements.
Cost of equity
The method preferred for calculating the cost of equity for Amazon.com is by applying CAPM model. The beta for 2014 has been determined by using the daily returns of market index i.e. S&P 500 and the stock (Finance, 2014). The results were as shown in the table below: Covariance | 0.000069 | Variance | 0.000050 | Beta | 1.380 |
Formula used for beta is:
Beta=…...

### Similar Documents

#### Wacc

...capital. When evaluating projects, the internal rate of return on the project, or how much money the project will generate, can be compared to the cost of capital, which is the cost of financing such a project. If the rate of return exceeds the cost of capital, the project is probably a good one (in terms of cost only). The cost of capital takes into account the cost of debt and the cost of equity. The cost of debt could be the effective interest or coupon rate a firm currently pays on its debt. It could also be the rate of return required by a firm’s creditors. The cost of debt is often calculated net of taxes, since firms can deduct interest expense from their income for tax purposes. The after-tax cost of debt is equal to the pretax cost of debt times one minus the firm’s marginal tax rate. Common types of debt are loans and bonds. A firm’s cost of equity is the return its stockholders require. It is the rate investors require accounting for the time their money is tied up in a firm and the risk they encounter in doing so. It can be calculated in two main ways, although there are many possible ways to estimate the cost of equity. One common way of determining the cost of equity is via the dividend growth model. This model projects the cost of equity using dividends paid and some assumption about growth in the future relative to the firm’s stock price. The cost of equity may also be estimated using the Capital Asset Pricing Model or CAPM. The model projects the cost of......

Words: 1035 - Pages: 5

#### Wacc

...How to Calculate the WACC From a Balance Sheet | eHow.com Page 1 of 2 Print Article Discover the expert in you. How to Calculate the WACC From a Balance Sheet By Morgan Adams, eHow Contributor Weighted average cost of capital (WACC) is a calculation of a company's cost of capital, or the minimum that a company must earn to satisfy all debts and support all assets. The calculation includes the company's debt and equity ratios, as well as all long-term debt. Companies usually do an internal WACC calculation to assess overall company health. The larger and more complex a company is, the harder it is to determine WACC. Unfortunately, only some of the information needed to calculate WACC can be found on a balance sheet. Difficulty:Moderate Instructions Calculating WACC 1 Gather the required information from the balance sheet. Finding the information is the hardest step. Write out the full WACC equation and list the variables separately. It is a good idea to make a list of all your variables before rewriting the equation. WACC = [(E/V) * Re] + [(D/V) * Rd * (1-Tc)] Re= cost of equity (expected rate of return on equity) Rd = cost of debt (expected rate of return on debt) E = market value of company equity D = market value of company debt V = total capital invested, which equals E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Start calculating the variables. Start with cost of equity and......

Words: 621 - Pages: 3

#### Wacc

...CALCULATION of WACC for Quarter 2 (Based on the “Summary Data” from Sample Quarter 1) What is the market value of the capital raised by debt? (for debt, book value approx = market value) Short-term Loans Maturing \$ 0 Intermediate Term Debt Maturing \$1,850,000 Current Liabilities Bond Maturing \$1,200,000 Intermediate Loans 2 year \$ 937,500 3 year \$ 0 Long Term Liabilities Bonds \$1,200,000 Total Capital Raised by Debt \$5,187,500 What is the market value of the equity? Multiply stock price (\$37.49) times number of common shares (1,000,000) = \$37,490,000 What is the market value of the debt + equity? \$5,187,500 + 37,490,000= \$42,677,500. What would be the annual after-tax cost for new long-term bonds? The cost of long term debt (Bonds) for quarter 2 will be 1.980% per quarter (this is found under Information for Future Quarters) which is 7.92% per year The after-tax cost is 7.92% x (1-0.4) = 4.75%/Yr What would be the after-tax cost of new short term loans? 1.616% x 4 = 6.46% x (1-.4) =3.88% / year What would be the after-tax cost to get more 2 and 3 year debt? (To keep things simple, just take an average of the cost of new 2 and 3 year debt, then reduce the cost by the tax shield): [1.698% + 1.784%] / 2 = 1.74% per quarter x 4 =6.96% per year x (1-.4) = 4.18% / year. (To be most correct you should take a weighted average, but a simple average is ok for our purposes) What is the cost of......

Words: 504 - Pages: 3

#### Wacc Example

...Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of \$248.5 billion and operating income of \$42.2 billion. The company has been in business for over 120 years and employed more than 80,000 individuals. Janet Mortensen, the senior vice president of project finance for Midland Energy Resources, has been asked to calculate the weighted average cost of capital (WACC) for the company as a whole, as well as each of its three divisions as part of an annual budgeting process. Midland’s Three Divisions: Exploration & Production Oil exploration and production (E&P) is Midland’s most profitable business, and its net margin over the previous five years was among the highest in the industry. With oil prices at historic highs in early 2007, Midland anticipated heavy investment in acquisitions of promising properties, in development of its proved undeveloped reserves, and in expanding production. They also needed to account for competition from areas such as the Middle East, Central Asia, Russia, and West Africa. Refining and Marketing Midland had ownership interests in forty refineries around the world with distillation capacity of five million barrels a day. Measured by revenue...

Words: 1750 - Pages: 7

#### Wacc

...INTRODUCTION This memo addresses the feasibility of the NESA project and provides a brief overview of: our financial condition, the iron ore market, major risks associated with this project, estimated project NPV, and the benefits of the financing packages. From our analysis, the NPV of this project is \$137.36M - \$104.31M. While there is risk associated with venturing into an unfamiliar market in a politically volatile country, the debt financing packages mitigate this risk. Thus, we believe that the project should be accepted. FINANCIAL CONDITION We experienced growth in earnings from \$98M in 2002 to \$1.84B in 2011, due to improved operating margins (Appendix 1). The improvements in ROE and ROA have outpaced our competitors, implying that we are getting higher returns for each dollar invested in shareholder’s equity and assets. Although we have a more aggressive debt strategy, our D/E ratio never exceeded 50% from 2002 to 2011. Despite the slight 4% decrease in our cash and current ratios, their values are still well above one. We are still in a good financial position as we have accumulated a lot of cash and our debt is being used effectively to take advantage of investment opportunities. Therefore, we are in an excellent position to take on new projects. NEW INVESTMENT OPPORTUNITY AND ASSOCIATED RISKS The iron ore investment in South Africa is an attractive opportunity since it allows us to diversify our operations and lessen our dependence on unsustainable......

Words: 6361 - Pages: 26

#### Wacc

...Book Value VS Market value Weights You should always use the market value weights to calculate WACC. In practice, firms do use the book value weights. Generally, there will be difference between the book value and market value weights, and therefore, WACC will be different. WACC, calculate using the book value weights, will be understand if the market value of the share is higher than the book value and vice versa. Why do managers prefer the book value weights for calculating WACC? Beside the simplicity of the use, managers claim following advantages for the book value weights: Firms in practice set their target capital structure in terms of book values. The book value information can be easily derived from the published sources. The book value debt equity ratios are analyzed by the investors to evaluate the risk of the firms practice. The use of the book value weights can be seriously questioned on theoretical grounds. The component costs are opportunity rates and are determined in the capital markets. Te weights should also be market determined. The book value weights are based on arbitrary accounting policies that are used to calculate retained earnings and value of assets. Thus they are not reflecting economic values. It is very difficult to justify the use of the book value weights in theory. Market value weights are theoretically superior to book value weights. They reflect economic values and are not influenced by accounting policies. They are also...

Words: 299 - Pages: 2

#### Nike Wacc Project

...Nike Wacc: September 2013 Find the Values of the Components in the Capital Structure E = 890.35M shares \$65.40 = \$58,228.89 million P = N/A L= 1447.358M B = 826.041M V = 58,228.89M + 826.041M + 0 + 1447.358M= \$60,502.289M Find the Weights of the Components in the Capital Structure E/V = 58,228.89/60,502.289= 0.962 B/V = 826.041/60,502.289 = 0.0137 L/V = 1447.358/60,502.289 = 0.0239 Find the Component Marginal Costs of Capital kd = 0.0769 {see table} ke = rf + β(km - rf) = 0.0389 + .61(0.57) = 0.07367{CAPM} kL = kd(1-t) + ρL = .0769 (1-.35) + .02 = .069985 Plug into the Equation and Hack the WACC ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V) ka = 0.07367(0.962) + 0.0769(1 - 0.35)(0.0137) + 0.069985(0.0239) ka = 0.0732 0.07 The Cost of Capital Project: Nike Objective The assignment at hand is to estimate the weighted average cost of capital (WACC) for Nike at the current time. The Primary Equations The theory of why managers should use WACC in net present value analysis comes later in the course. For now, start with the equations for WACC, per se: ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V)  V = E + B + P + L The symbol, ka, is the same as WACC. V is the total market value of the corporation. Table 1: | Nike: September 9, 2013: Long-Term......

Words: 1239 - Pages: 5

#### Walmart Wacc

...Wal-Mart and Target WACC We computed the WACC for Wal-Mart and Target based on their most current financials. The weights of debt and equity were obtained from MorningStar.com. The risk free rate is the current rate for 30 year treasuries, and the cost of debt is the current 20 year rate on corporate bonds rated AA and A+. The tax rates were estimated by dividing the taxes paid from the operating income from Wal-Mart and Targets income statements. The market risk premium was obtained from the class, and is set at 5.5%. The betas and all other information were obtained from Google Finance. The goal of this project was to calculate different levels of WACC for Wal-Mart and Targets. We started by calculating the firms current WACC, and then a new WACC that had 50% more debt. To start, we had to calculate the firms cost of equity. We took the risk free rate and added it to the beta multiplied by the market risk premium. For example – Wal-Mart’s cost of equity was calculated as follows: Cost of Equity = 4.38% + .33(5.5%) We then calculated WACC by taking the weight of debt times the after tax cost of debt, plus the weight of equity times the cost of equity. We then increased debt by 1.5 for both companies, and re-levered their betas. After we re-levered the betas a new cost of equity can be calculated and then a new WACC is calculated. The results are typical, with WACC staying similar and the cost of equity rising. The following table shows Wal-Mart and Targets......

Words: 473 - Pages: 2

#### Wacc

...debts (bonds) \$5,000,000 Total liabilities + equity = \$10,000,000 1. Calculate the firm's WACC = 50% (4%)(1-40%) + 20%(12%) + 30%(6%) = .50(.04)(1-.40) + .20(.12) + .30(.06) = 0.012 + .042 = .054 or 5.4 % 2. If, as the firm's CFO, you wished to lower the WACC, make up a set of new dollar figures using different amounts of common stock, preferred stock, and long-term debt that would lower the WACC. Show the calculations to demonstrate that the new capital structure has a lower WACC than the original structure. Capital | Debt 60% | Equity 40% | Bonds | 4% | C. Stock (10) | 12% | tax | 40% | P. Stock (30) | 6% | Common stock \$1,000,000 Preferred stock \$3,000,000 Long-term debts (bonds) \$6,000,000 Total liabilities + equity = \$10,000,000 = 60%(4%)(1-40%) + 10%(12%) + 30%(6%) = .60(.04)(1-.40) + .10(.12) + .30(.06) = 0.0144 + .03 = .0444 or 4.44 % 3. Explain why you may want to lower the firm's WACC. By increasing the firm’s dept and contribution by the preferred stock holders, the WACC has decreased. A CFO may want to lower a firm’s WACC as an expressed desire to improve ROE. This can be done by the approval of more projects that were previously denied because the WACC was too high. Also, the lower the WACC the value of the firm increases. This also increases the stock value per share.......

Words: 320 - Pages: 2

#### Cost of Capital Project (Wacc)

...Colby Wagoner Cost of Capital Project(WACC) FIN 4422 T: 7:10-10 1. Marginal Cost of Debt: Kd= rf + Spread Kd= .0295(or 2.95%) + .0577(or 5.77%)= .0875(or 8.75%) 2. Marginal Cost of Equity: Ke= Kd+Risk Premium Risk Premium for choosing to invest in a more risky asset, the premium will be set at 10% due to the the falling stock price and ROE has dropped to -200% making the risky stock unappealing so setting the premium as high as I did should influence investors. Ke= .0875+.10= .1875(or 18.75%) 3. Marginal Cost of Preferred Stock: Preferred Stock Return would be a little less, Costing us 17.75% because the preferred stock(even though this company does not have any) would be less risky because of the fact that shareholders of preferred stock would get payed before those holders of common stock. 4. Marginal Cost of Leasing: KL= Kd(1-T)+ Premium KL=.0875(1-.35)+.02= .0769(or 7.69%) Referring to my source, under leases, it says it has various % so .02 premium would seem appropriate due to an increased risk of default. “The Company enters into non-cancelable operating leases for retail stores, distribution facilities, equipment, and office space. Most leases have fixed rentals, with many of the real estate leases requiring normal and customary additional payments for real estate taxes and occupancy-related costs. Rent expense for leases having rent holidays, landlord incentives or scheduled rent increases is recorded on a straight-line......

Words: 581 - Pages: 3

#### Wacc

...5%) = 14.33% Cost of Capital = Cost of Equity (Risk Free Rate) + YTM (1- Tax Rate)(Debt Portion) = 14.33% (0.8) + 10% (1-0.4) (0.2) = 12.66%  Therefore WACC = 12.66%. This value can be used to discount any project ii. The firm is proposing borrowing an additional RM200 million in debt and repurchasing stock. If it does so its rating will decline to A, with a market interest rate (yield to maturity) of 12%. What will the weighted average cost of capital be if they make this move? (3 marks) New Market Value of Equity = RM800 Million – RM200 Million = RM600 Million If the firm borrows RM 200 million repurchase stock, Equity will drop to RM 600 million New Debt/Equity Ratio = Debt Value / Equity Value = 400/600 = 0.67 Unlevered Beta = AVG Beta / (1+ Equity Portion * Old Debt Equity Ratio) = 1.15 / (1 + 0.6*0.25) = 1.00 New Beta = Unlevered Beta (1+Equity Portion * New Debt Equity Ratio) =1.00 (1+0.6*0.67) = 1.40 New Cost of Equity = Risk Free Rate + New Beta (Market Risk Premium Rate) = 8% + 1.40 (5.5%) = 15.70% New Cost of Capital = Cost of Equity (Risk Free Rate) + YTM (1- Tax Rate)(Debt Portion) = 15.70% (0.6) + (44/400) (1-0.4) (0.4) = 12.06 % Therefore WACC = 12.06% iii. Why do you think the company’s rating will decline with the move of stock repurchasing as mentioned in question 2(b) above? (3......

Words: 822 - Pages: 4

#### Bus 5440 Google Wacc Project

...BUS 5440 Google WACC Project Click Link Below To Buy: http://hwcampus.com/shop/bus-5440-google-wacc-project/ Google WACC Project In this project, you will find and discern the appropriate data to determine a realistic assessment of the weighted average cost of capital for Google. You will need to search for data from several sources, use subjective judgment to determine which data to use or discard, use subjective judgment to determine which calculation gives a more acceptable estimate and make some simplifying assumptions. The purpose of the projects is to show some of the sources of measurement errors in financial analysis, to introduce the diverse sources of publicly available financial information and to develop skill in analysis in situations where there are too much or too little data. Pages showing equations with data and brief description There is no page length given for this as it can vary greatly. This section is to be divided up based on the topics. In each section, you must show and explain the equations that are used. In addition, you are to draw any conclusions on the company you can from this data. Please note that detailed worksheets showing all of the calculations for this section are to be included in an appendix. Cost of Equity (Common Stock) Beta from Regression and two Betas from analysts Beta Chosen for CAPM and why Capital Assets Pricing Model (include how determined RF and[ RM or (RM – RF)] Discounted Cash Flow (DCF) (only...

Words: 447 - Pages: 2

#### Wacc

..."equity risk premium", and is equivalent to the risk premium of the market as a whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market. Thus, the cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium). 2. Capital structure. Next, we calculate the proportion that debt and equity capital contribute to the entire enterprise, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return. 3. Weighting the components. Finally, we weight the cost of each kind of capital by the proportion that each contributes to the entire capital structure. This gives us the Weighted Average Cost of Capital (WACC), the average cost of each dollar of cash employed in the business.  ...

Words: 398 - Pages: 2

#### Wacc

... Step 3: Calculate the PV of the expected dividends: PVDiv = \$2.40/(1.123) + \$2.88/(1.123)2 = \$2.14 + \$2.28 = \$4.42. Step 4: Calculate : = D3/(rs – g) = \$3.08/(0.123 – 0.07) = \$58.11. Step 5: Calculate the PV of : PV = \$58.11/(1.123)2 = \$46.08. Step 6: Sum the PVs to obtain the stock’s price: = \$4.42 + \$46.08 = \$50.50. Alternatively, using a financial calculator, input the following: CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and then enter I/YR = 12.3 to solve for NPV = \$50.50. Question 1. Rollins Corporation (RC) is estimating its weighted average cost of capital. (WACC). Its target capital structure is 20% debt, 20% preferred stock and 60% common equity. Its outstanding bonds have a 12% coupon rate, paid semiannually, a current maturity of 20 years, and sell in the marketplace for \$1,000. RC could sell at par, \$100 preferred stock that would pay a 12% annual dividend, and flotation costs of 5% would be incurred. RC’s beta is 1.2, the risk-free rate is 10% and the market risk premium is 5%. RC is a constant-growth firm that just paid an annual dividend of \$2.00; its common stock currently sells for \$27 per share, and has a growth rate of 8%. RC’s policy is to use a risk premium of 4% when using the bond-yield –plus premium method to find the cost of equity. RC’s marginal tax rate is 40%. PLEASE SHOW......

Words: 464 - Pages: 2

Free Essay

#### Wacc

...equity and debt. According to our text the r above the little e is the required return for equity, and the r above the d is the required return for debt. L is the market value proportion of debt financing and T is the marginal corporate tax rate on income for the proposed project. In word format the equation states that WACC is the equity of the firm divided by the debt plus equity times the required return of equity plus the debt divided by the debt plus equity times one minus the marginal corporate tax rate on the project times the required return for debt. This should equal one minus the market value proportion of debt financing times the required return for equity plus the market value proportion of debt financing times one minus the marginal tax rate times the required return for debt. The WACC is expressed as an after-corporate-tax- return because investors are paid after the corporate taxes are. Furthermore, in regard to equity is also an after corporate tax return (Emery, Finnerty & Stowe, 2007). To use the WACC one must understand the purpose is twofold. First as a measure to ensure that the financial obligation of the company is being held to a certain set of standards. The end goal of the WACC is to generate capital for those who hold stake within the company. When these numbers are not reflected are there are measured losses this is how the company can see that changes need to be made to shift in a profitable direction....

Words: 285 - Pages: 2