The data used for the attached case study has to be EXON-MOBIL company data.
- For the first part, you need to find the weighted average cost of capital (WACC) of your company.
- You have already found the beta of your company (available also in finance.yahoo.com). Find the average risk-free rate and market return for the same period. For the risk-free rate use the treasury bond or bill rate. For the market, use S&P 500 return. Convert monthly return into annual return. From all the information above, find the expected return of your stock. You can also call it cost of capital for equity. (hint: you can use CAPM).
- Now, you need to find cost of debt of your company. Do some research to find the YTM of your company. It should be available in the internet.
- Next you need to know the weight of debt and equity in the capital structure. Go to finance and open the annual balance sheet of your company. It will give you information regarding the value of debt (use only long-term liability for simplicity) of your company. Total value of equity of your firm is the market capitalization (no. of shares outstanding times stock price). Total value of your firm is the summation of the value of equity and the value of debt.
- Average tax rate in the U.S. is about 25%.
- Once you have all the information, use the formula for WACC to find the cost of capital of your firm. This is the minimum rate of return your firm must make if any new project is accepted.
- Tell me what could happen to WACC if interest rates go down in the U.S. goes up. Discuss.
- The U.S. and China are now engaged in heated trade negotiations. What will happen to WACC if the trade negotiation fails? (Assume your firm has significant business with China).
Finance group case study