Module 3 Estimating cost of e

The purpose of this project is for you to have some practice working with financial concepts in the real world. This will involve integrating some material from throughout the course.  The project will also involve the development of your own approach to doing the work.  The project does not provide a step-by-step procedure for you to follow.

Your task is to determine the WACC for a given firm using what you know about WACC as well as data you can find through research. Your deliverable is to be a brief report in which you state your determination of WACC, describe and justify how you determined the number, and provide relevant information as to the sources of your data. Instead of submitting two files, report’s elements can be embedded in Excel file.

With the help of your professor, you have selected a company for which to research and find the WACC. The company is EXON MOBIL. Your research is to be independent from any information you may find at thatswacc.com or similar sites although you might want to use such sites to provide a reasonableness check on the WACC you calculate.

Assumptions

As you recall, the formula for WACC is

The formula for the required return on a given equity investment is

ri= rf + ?i * (RMkt-rf)

rMkt-rf is the Market Risk Premium. For this project, you may check Damodaran’s website to estimate risk premium based on historical data (as a difference between S&P 500 and Bond returns) or use implied risk premium. You may also use other sources to estimate the Market Risk Premium. Usually it is assumed to be in the range between 3% and 8%.

rf is the risk free rate. The YTM on 10 year US Treasury securities is a good approximation.

You may assume a corporate tax rate of 21%.

One good source for financial data for companies as well as data about their equity is http://finance.yahoo.com.  By looking around this site, you should be able to find the market capitalization (E) as well as the ? for any publicly traded company.

There are not many places left where data about corporate bonds is still available. One of them is http://finra-markets.morningstar.com/BondCenter .  To find data for a particular company’s bonds, find the Quick Search feature, then be sure to specify corporate bonds and type in the name of the issuing company. This should give you a list of all of the company’s outstanding bond issues. Clicking on the symbol for a given bond issue will lead you to the current amount outstanding and the yield to maturity. You are interested in both. The total of all bonds outstanding is D in the above formula.

If you like, you can use the YTM on a bond issue that is not callable as the pre-tax cost of debt for the company.