As you know. I\'m doing my valuation project on FUR Systems, Inc. (FLIR). Please

Question

As you know. I'm doing my valuation project on FUR Systems, Inc. (FLIR). Please help me with my project by calculating the following for FLIR: The current Cost of Equity (K,) The current Weighted Average Cost of Capital (WACC) Please use whatever information you feel is appropriate to make this calculation - 10-K, 10- , stock returns, current market data, etc. However, do not make any subjective determinations based on operations or strategic risk analysis. The 10-K and 10- reports can be found at www.sec.gov by looking under the 'Search Filings" links and searching for FLIR Systems (or ticker FLIR). Current market price and return information can be obtained from finance.vahoo.com and getting the Historical Prices for FLIR. Please do not simply rely on the data from the Key Statistics link on Yahoo! Finance - please be more thorough with your work. You may use this for validation of your work, but p'-ease do your own work to determine market values, Beta, returns and any other market price-related information. (In reality, we might take some non-quantitative factors into account when calculating a WACC - such as the company's dependence on the U.S. government as a customer. This may present a unique risk that is not captured appropriately in the data. In reality, this is something that I will do when I perform my valuation of FLIR and it is something that you should do when you perform the valuations of your project companies. But, please do not do it for this -1 cannot expect you to learn or understand FUR the way I do for this homework assignment.)

Explanation / Answer

Using data from Yahoo Finance

http://finance.yahoo.com/q/ks?s=FLIR+Key+Statistics

Cost of equity :

FLIR's beta() = 1

US 10-year Treasury bond = 2.0%   -> Rf

Market risk premium(MRP)= 7%  

Ke = Rf + MRP* = 1+7(2) = 9%

Cost of debt :

FLIR have only 5-year bonds

US 5-year Treasury bond = 0.875%

FLIR Bond's ratings : Baa3, BBB-

http://www.reuters.com/article/2011/08/16/markets-corporatebonds-calendar-idUSN14ORP20110816

CDS = 2%

http://people.stern.nyu.edu/adamodar/pdfiles/cfovhds/Riskfree&spread.pdf   (page3)

Kd = Rf +CDS = 2.875%

WACC:

Market Cap = 4.18B

Total Debt = 247.75M

Debt+Equity = 4427.75M

WACC = [E/(D+E)]*Ke+ [D/(D+E)]*Kd

WACC = (4180/4427.75)*(9%) + (247.75/4427.75)*(2.875%) = 8.66%

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