After graduating from the university, you have been offered a job at Hewlett Packard as a junior finance officer. The se
Posted: Sun May 29, 2022 6:27 pm
After graduating from the university, you have been offered a
job at Hewlett Packard as a junior finance officer. The senior
management is going to have a meeting in the coming month on the
company's capital structure. Your immediate boss assigns you a task
to provide him with some inputs on the existing cost of capital of
the company. As a comparison, he requires you to provide the cost
of capital information of Dell Inc. too. You are excited about this
first assignment and immediately start working on the report. You
had learnt from your corporate finance unit that calculating the
cost of capital (WACC) requires the market information of debt and
equity (both common and preferred). To find the required
information, you start thinking about their data sources. After a
quick search, you found some sources for the financial data: a.
Yahoo Finance— https://finance.yahoo.com/ b. Finra—
https://www.finra.org/#/ c. Bloomberg—
https://www.bloomberg.com/asia 1. You wish to get the yield to
maturity rate (YTM) of a 10-year government bond for a riskfree
rate. You visit
https://finra-markets.morningstar.com/M ... efault.jsp and
look for the YTM of a 10-years Treasury bond. You also verify the
information from another source too to confirm that the rate is
similar (Please take the screenshots of the rates from different
sources and paste them into the Appendix). Explain in a maximum of
three lines why you would need the risk-free rate information in
this situation? (Please remember that YTM changes on every trading
day. You can use the rate for a particular day you started
collecting the information for this assignment). For instance, if
you start the assignment on the 5 th of May, you can use the rates
given on this date. 2. For the information on debt, you may use the
value of debt (book value) and its cost (coupon payments) available
on the balance sheet. However, you prefer the market value method
for the WACC estimation. You had learnt that yield to maturity of a
bond (YTM) reflects the return a bondholder expects, assuming that
they hold the bond until maturity. To get the market value of debt
(sum of MV of all debts) and its associated cost (YTM), you visit
Finra website
(https://finra-markets.morningstar.com/B ... efault.jsp) and
use the ticker of the companies (HPQ, DELL) in the search box under
"BONDS" section. After entering the ticker symbol in the search
box, you see a list of bonds issued by both the firms with
different maturities and coupon rates—please refer to Appendix A as
an example. All the bonds with remaining maturities mean that the
firm needs to pay back these debts. So, the total market value of a
firm's debt will be the sum of the market value (Price x bond
outstanding) of all outstanding bonds. To find the information
about the amount outstanding, you select the "Issuer Name" and find
this information at the right bottom. You assume that both the
firms use the YTM of 10-year obligations for the cost of debt. It
means that from the point where you have started doing the
estimation, you will use the YTM of a bond maturing in the next ten
years. Please note that if you can't find the bond maturing in
exactly ten years, you can find the closest one. For instance, if
you start from April 2022, you should use the YTM of the bond
maturing in April 2032. If you can't find 2032, you can use the YTM
of bonds with the closest maturity after 2032 (e.g., 2033, 2034,
2035)—please take the screenshot and highlight the rate you are
using for your cost of debt. Also, if you find more than one bond
with the same maturity, it is totally up to you which one you
chose. You get the information on the outstanding amount by
clicking on the "BOND SYMBOL" and looking for the information at
the bottom. Download the details of all outstanding bonds (with
remaining maturities) in a table and calculate their total market
value. See an example of the list of bonds in Appendix A. Prepare a
table of outstanding bonds similar to the example given below: Last
Sale Issuer Name Bond Symbol Coupon Maturity Price Yield Amount
Outs. MV ABC comapany ABC11 5 08/15/2032 100 3.9 ABC comapany ABC22
6 07/15/2093 120 4 3. Next, you wish to collect the information on
the market value of equity (market capitalization), systematic risk
(beta), cash, net debt, and enterprise value of the firm. For this
purpose, you visit Yahoo Finance and key in the tickers of the
companies (HPQ, DELL). Under the section "Summary", you get the
information on systematic risk (beta), market capitalization, and
enterprise value and cash. What is the difference between the
market value of equity and enterprise value? For the estimation of
WACC, why would you need the information on these variables? Please
explain the two questions briefly in a maximum of five sentences.
4. Please explain the book value and market value approaches of the
WACC calculation. The explanation should not exceed five sentences.
5. You next calculate their weights once you get the total market
value of bonds outstanding and equity. 6. Calculate the cost of
equities for both the firms using CAPM, the risk-free rate you
collected in step 1, and a market risk premium of 5%. 7. Assume the
corporate tax rate is 35% for both firms. 8. Calculate the WACC of
both HP and DELL.
job at Hewlett Packard as a junior finance officer. The senior
management is going to have a meeting in the coming month on the
company's capital structure. Your immediate boss assigns you a task
to provide him with some inputs on the existing cost of capital of
the company. As a comparison, he requires you to provide the cost
of capital information of Dell Inc. too. You are excited about this
first assignment and immediately start working on the report. You
had learnt from your corporate finance unit that calculating the
cost of capital (WACC) requires the market information of debt and
equity (both common and preferred). To find the required
information, you start thinking about their data sources. After a
quick search, you found some sources for the financial data: a.
Yahoo Finance— https://finance.yahoo.com/ b. Finra—
https://www.finra.org/#/ c. Bloomberg—
https://www.bloomberg.com/asia 1. You wish to get the yield to
maturity rate (YTM) of a 10-year government bond for a riskfree
rate. You visit
https://finra-markets.morningstar.com/M ... efault.jsp and
look for the YTM of a 10-years Treasury bond. You also verify the
information from another source too to confirm that the rate is
similar (Please take the screenshots of the rates from different
sources and paste them into the Appendix). Explain in a maximum of
three lines why you would need the risk-free rate information in
this situation? (Please remember that YTM changes on every trading
day. You can use the rate for a particular day you started
collecting the information for this assignment). For instance, if
you start the assignment on the 5 th of May, you can use the rates
given on this date. 2. For the information on debt, you may use the
value of debt (book value) and its cost (coupon payments) available
on the balance sheet. However, you prefer the market value method
for the WACC estimation. You had learnt that yield to maturity of a
bond (YTM) reflects the return a bondholder expects, assuming that
they hold the bond until maturity. To get the market value of debt
(sum of MV of all debts) and its associated cost (YTM), you visit
Finra website
(https://finra-markets.morningstar.com/B ... efault.jsp) and
use the ticker of the companies (HPQ, DELL) in the search box under
"BONDS" section. After entering the ticker symbol in the search
box, you see a list of bonds issued by both the firms with
different maturities and coupon rates—please refer to Appendix A as
an example. All the bonds with remaining maturities mean that the
firm needs to pay back these debts. So, the total market value of a
firm's debt will be the sum of the market value (Price x bond
outstanding) of all outstanding bonds. To find the information
about the amount outstanding, you select the "Issuer Name" and find
this information at the right bottom. You assume that both the
firms use the YTM of 10-year obligations for the cost of debt. It
means that from the point where you have started doing the
estimation, you will use the YTM of a bond maturing in the next ten
years. Please note that if you can't find the bond maturing in
exactly ten years, you can find the closest one. For instance, if
you start from April 2022, you should use the YTM of the bond
maturing in April 2032. If you can't find 2032, you can use the YTM
of bonds with the closest maturity after 2032 (e.g., 2033, 2034,
2035)—please take the screenshot and highlight the rate you are
using for your cost of debt. Also, if you find more than one bond
with the same maturity, it is totally up to you which one you
chose. You get the information on the outstanding amount by
clicking on the "BOND SYMBOL" and looking for the information at
the bottom. Download the details of all outstanding bonds (with
remaining maturities) in a table and calculate their total market
value. See an example of the list of bonds in Appendix A. Prepare a
table of outstanding bonds similar to the example given below: Last
Sale Issuer Name Bond Symbol Coupon Maturity Price Yield Amount
Outs. MV ABC comapany ABC11 5 08/15/2032 100 3.9 ABC comapany ABC22
6 07/15/2093 120 4 3. Next, you wish to collect the information on
the market value of equity (market capitalization), systematic risk
(beta), cash, net debt, and enterprise value of the firm. For this
purpose, you visit Yahoo Finance and key in the tickers of the
companies (HPQ, DELL). Under the section "Summary", you get the
information on systematic risk (beta), market capitalization, and
enterprise value and cash. What is the difference between the
market value of equity and enterprise value? For the estimation of
WACC, why would you need the information on these variables? Please
explain the two questions briefly in a maximum of five sentences.
4. Please explain the book value and market value approaches of the
WACC calculation. The explanation should not exceed five sentences.
5. You next calculate their weights once you get the total market
value of bonds outstanding and equity. 6. Calculate the cost of
equities for both the firms using CAPM, the risk-free rate you
collected in step 1, and a market risk premium of 5%. 7. Assume the
corporate tax rate is 35% for both firms. 8. Calculate the WACC of
both HP and DELL.