Using the companies Delta Airlines and General Electric... Gather necessary info

Question

Using the companies Delta Airlines and General Electric...

Gather necessary information (cost of equity, cost of preferred stock if any, cost of debt, and weights on each component, and tax rates) for your companies and calculate the Weighted Average Cost of Capital (WACC).

You can find capital structure information from the most recent consolidated balance-sheet (annual) of your company. Finding cost of debt is difficult. I would start with company’s latest annual 10-k and search for the most recent senior notes. Similarly, tax rates may be found in 10-K. For example, if I want to find cost of debt for United Steel Corporation, I find 6.875% under Capital Structure and Liability. Similarly, I find 35% tax rate under 8. Income Taxes.

For more information, check the following link: http://www.sec.gov/Archives/edgar/data/1163302/000116330214000010/x2013123110-k.htm (Links to an external site.) You may use the following link to find your companies’ filling including 10-k. http://www.sec.gov/edgar/searchedgar/companysearch.html (Links to an external site.)

Document all your sources of information and any assumptions you made in developing the WACC. (Links to an external site.) (Links to an external site.)

Show all work and explain all answers.

Explanation / Answer

General Electric: Year 2014

Tax Rate = (4.34)%

Cost of Debt (before tax) or R debt = 5.25%

Cost of Equity or R equity = 9.63%

Debt (Total Liabilities) for 2012 or D = $525.994 billion

Stock Price = $26.77 (May 2nd, 2014)

Outstanding Shares = 10.06 billion

Equity = Stock price x Outstanding Shares or E = $269.306 billion

Debt + Equity or D+E = $795.3 billion

WACC = R = (1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

(1 – Tax Rate) x R debt (D/D+E) + R equity (E/D+E)

1 –.0419 x .0525 x ($525.994 /$795.3) + .0963 ($269.306 /$795.3)

0.9566 x 0525 x .6614 + .0963 x .3386

.0332 + .0326

= 6.58%

Delta airlines:

WACC We estimated our weighted average cost of capital (WACC) to be 7.53%. Cost of Equity: We utilized the capital asset pricing model (CAPM) to estimate our cost of equity. Our equity risk premium was 4.64%, the historical geometric average from 1928-2013. Also, we established our risk-free rate as 3.07%, which was the 30-yr T-Bond yield on 11/13/14. Our equity beta was 1.303, the three year weekly beta for Delta. Plugging in our estimated variables, we calculated a cost of equity of 9.12%. The market value of equity comprised roughly 67.3% of Delta’s enterprise value.

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