Pick a company from the list below. Indicate which one you chose.

AT&T, Darden Restaurants, Lockheed Martin, McDonalds, Dr. Pepper Snapple, Mattel, Kimberly-Clark, Hasbro, Campbell’s Soup, Microsoft, Staples, Nike

1) What is the company’s ticker symbol? Ticker = X

2) Find the amount of long-term debt (D):Publicly traded companies are required to produce annual accounting reports (10K) for the SEC detailing the financial operations of the past year. On the balance sheet, each company is required to list the value of long-term debt. (Note: Most of the tables in this report are created by accountants. Hence, this report provides book values. But, the book value of debt and the market value of debt are roughly equal.) These can be found on the SEC EDGAR webpage www.sec.gov/edgar.shtml. EDGAR stands for Electronic Data-Gathering, Analysis, and Retrieval system. Click “Search for Company Filings” then “Search by Company Name.”

Debt = X

3) Find the amount of equity (E):

a) What is the book value of equity? This can be found in the annual 10K report.

Book Value of Equity = X

b) What is the market value of equity? Several web pages list stock market information. All of this information can also be found on Bloomberg and Telemet using the terminals in the trading room. To find the information you need to find the amount of equity look in the Equity Research Category in the Key Stats and Company Financials Page. NOTE: Book equity and market equity are different!

Market Value of Equity = X

4) Use the answers to questions 2 and 3 to determine the market capital structure weights.

a) Weight of Debt = X

b) Weight of Equity = X

5) Estimate the cost of debt (rD):You can find bond information for current bonds outstanding at the bond web page finra.org.

a) How many different bonds does the company currently have outstanding?

Number of bonds = X

i) What is the length of each bond?

X

ii) Do the bonds have any special features (puts, calls, sinking funds, etc)?

X

b) What is the cost of debt of the most recently issued bond?

X

c) What do you think that the cost of debt will be if the company issues a new bond?

X

6) Estimate the cost of equity (rE) two different ways:

a) Dividend Growth Model

i) What is the current annualdividend (D0)? On the Yahoo finance page follow the link for “Historical Prices” and then “Dividends Only.” This table can be exported into Excel to help you do calculations by clicking on “Download to Spreadsheet.”

Embed Excel Spreadsheet showing dividends for the last few years.

Current annual dividend = X

ii) Determine the annual dividend for the past several years. Is there an approximate pattern to the dividends? Are the dividends constant, growing, or uneven?

X

iii) If the dividends grow over time, find dividend growth (g).

g = X

iv) Find the current stock price (P0).

P0 = X

v) Using the information above calculate the cost of equity using the constant dividend model or the dividend growth model or state that neither one can be used.

Cost of Equity = X

b) Capital Asset Pricing Model

i) Several sources list β including Telemet and Bloomberg. Find β from 3 different sources. State which source you used. Why are the betas different from different sources?

Source 1 = X, β = X

Source 2 = X, β = X

Source 3 = X, β = X

Reason why betas are different.

ii) Estimate β yourself.

(1) Download the historical stock price of your company and use them to calculate returns.

Embed an Excel Spreadsheet showing the stock price and returns with only few lines showing.

(2) Download the historical price of the S&P 500 index to use as an approximation of market performance. Use the prices to find returns.

Embed an Excel Spreadsheet showing the stock price and returns with only few lines showing.

(3) Run a regression in which returns of the company are the dependent variable and S&P 500 index returns are the independent variable. Note: Your estimate of β should be very similar to the βs that you provided above. If it is very different, you are doing something wrong.

Show regression results.

β = X

iii) Find Rf. What is the risk-free rate based on?

Rf= X

State the source of Rf

iv) You can assume that Market Risk Premium is 6.1%. Using the information above, calculate the cost of equity using the CAPM.

Cost of Equity =

c) Based on your different estimates, what do you think that the cost of equity is?

Cost of Equity =

7) What is your company’s WACC?

Show the formula and numbers that you used to solve WACC.

WACC = X

8) The company is considering a new project. At the end of the first year of the project they could earn net operating cash flow of $1 million, $2 million the following year and, $3 million in the last year. If the project requires an initial investment (upfront cost) of $5 million, would you advise them to accept the project? Why?

Show your work.

9) The company is considering a different project which could earn net operating cash flows of $500,000 per year for the next 10 years. The project costs $4 million. Would you advise them to accept the project? Why?

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