# Construct the capital structure of the firm to find the wd and we components of the WACC

Review the guidelines for instructions on completing this assignment.

Consider the following simple rules of observation to help determine the final results:

• If the Beta coefficient and the required rate of return on common equity is not increasing constantly as the amount of debt in the structure moves from 0% to increasing levels of debt, something is wrong.
• If the cost of debt does not fall and then begin to increase as the risks of bankruptcy increase, something is wrong.
• If the WACC curve does not display some type of U-shaped form (Note: You may have to make the vertical percentage cost scale have very small increments to show this.), something is wrong.

BSA 554 WACC Project Check-list:  NOTE:  There are additional detailed instructions for your review in the Excel template.  My company is Lowes

1.       Determine the firm’s (Lowes)rd from the 10-K report in the Note to the Long-term Debt, where rd = ∑(wdi*rdi), where wdi = the weight of debt for each bond and rdi is the coupon rate for each bond.  Please regard equation 6.6 on page 247 for a review of the methodology.  You must show your calculations for credit to be earned for the rd component.  Just stating a rd percentage will result in a 5-point deduction, if the percentage is not calculated from the list of bonds stated in the 10-K.  Please state the page number of the 10-K that contains the listing of the outstanding bonds issued by the corporation.

2.       Construct the capital structure of the firm to find the wd and we components of the WACC.  Note that the dollar amount of long-term debt and the dollar amount of total equity should be utilized.  Preferred equity dollar amount should be included in the calculation if the firm still has preferred equity outstanding.  Note that long-term debt is not the same as total liabilities.  Also note that the wd plus the we must equal 1.00.  You will have to show the dollar amounts and the construction of the weights from the 2017 (or 2018) balance sheet for your firm.

3.       Find the firm’s beta.  Also include the source of this information.  You may take an average of betas for the firm if differing sources, such as Google Finance, Yahoo Finance, and the 2017 (or 2018) 10-K have slightly differing beta amounts.

4.       Determine the firm’s tax rate from the 10-K information.  Please make sure to include the page number where you determined the firm’s tax rate in the 10-K report from the previous fiscal year.

5.       Find either the 1-year Treasury bill rate or the 10-year Treasury note rate at the close of the firm’s fiscal year.  If the risk-free rate is provided by the firm in the 10-K, please utilize this percentage. Full credit will not be earned if the 4% rfr in the givens in the instructions is utilized.  https://www.federalreserve.gov/releases/h15/  Current rates may be utilized.

6.       Find an appropriate rm percentage for the previous fiscal year.  Full credit will not be earned if the 8% rpm given in the instructions is utilized.  You will have to find the 2017 (or 2018) return for the S&P 500, the NYSE Composite Index fund, or the NASDAQ 100 Composite Index fund.  Please check to see where your firm is traded, and utilize the appropriate Index fund.

7.      Construct the current CAPM rs for the firm.  Please review page 258, equation 6.14.

8.      Please construct a rs utilizing a Discounted Dividend Model. Please state how the Do, the growth rate, and the price per share was determined by including the associated calculations and web-links on this tab.  Please align the price-per-share with the date of the close of the fiscal year.

9.  Construct the current WACC for the firm utilizing the CAPM Rs and then the DDM Rs.  Please review page 375, equation 9.2.  Note that you do not have to utilize the short-term debt portion in the equation.  You must show the components and the calculations for credit.  Note that you are constructing TWO WACC equations.

10.       Calculate the beta unlevered.  Please review page 611, equation 15-10. Please provide the equation and the previous tabs’ components.  You will be utilizing the firm’s beta, capital structure, and tax rate for the fiscal year analyzed.

11.   Calculate the new beta levered at plus AND minus 5% or 10% intervals of wd in the firm’s capital structure.  Please review page 611, equation 15.9a.  Please utilize the current capital structure determined in step 2 to begin the process.  Your wd should go close to 0% to close to 100% in the calculations.

12.   Determine the new rs CAPMs at each differing capital structure utilizing the new levered betas. Each CAPM needs to be calculated in the cell’s formula.  Please show your work in order to earn credit.

13.   Make sure to adjust the rd by plus AND minus the percentage of wd’s change, so that a leverage increase of 5% should result in a new rd of (rd*1.05) and a leverage decrease of 5% should result in a new rd of (rd*0.95).  Please refer to page 610 figure 15-5.

Please review the week-10 announcement that includes information on problems 15-9, 15-10, and 15-11 on pages 622 and 623.

14.   Replicate rows 1 to 6 in figure 15-5 on page 610 to determine the capital structure where WACC is minimized.

15.   Graph the WACCs at the different capital structures of the firm as stated in the instructions.  Note that the WACC graph should be in a “U” shape.

16. Calculate the FCF utilizing Figure 2-5 on page 65.  Please show the calculations for steps 1 to 5.

17.  Using a zero-growth valuation model of V^0 = FCF/WACC, determine the V^0 at the current capital structure utilizing both the CAPM WACC.  Please show your calculations from the previous tabs.

18.  Using a zero-growth valuation model of V^0 = FCF/WACC, determine the V^0 at the optimal capital structure.

19.  Determine the estimated stock price per share utilizing Figure 7-6 on page 309.

20.  Review that stock price of the firm at the close of fiscal 2017 (or 2018).  Compare the market price to the calculated intrinsic price, and make a recommendation on the stock.   Support your recommendation with a stock chart and analysts’ information.  Please write a paragraph recommendation for a buy, sell or hold for the stock based on your valuation per share versus the market price of the stock.

The project is due by Sunday, January 27th. No late work will be accepted.

You must utilize the MS EXCEL Template provided in the week-10 tab.