Chap 13 - WE 1 Estimate the weighted-average cost of capital for Home Depot, Alt

Question

Chap 13 - WE 1

Estimate the weighted-average cost of capital for Home Depot, Altria, Caterpillar, Intel, and Du Pont.

You can estimate the expected stock returns for these companies by using the betas shown on finance.yahoo.com .

You can also use Yahoo! Finance to find the relative proportions of equity and debt for each company. Remember, though, to use the market value of the equity, not its book value.

Finding the yield on the debt is a little trickier.

One possibility it to log on to www.bondsonline.com to find the current level of Treasury yields and the yield spreads (i.e., the extra yield for bonds with different ratings).

An alternative is to look at the yields shown in the bonds section of Yahoo! Finance. Note: As we write this, Moody’s ratings for the five companies vary from Baa for Altria, to A for Home Depot, Caterpillar, Intel, and Du Pont.  

Explanation / Answer

weighted avarage cost of capital can be calculated by the follwoing way:

weight of equity capitl*cost of equity+ weight of term loans*cost of term loans+ weight of debenture capital*cost of denture capital+weight of retained earnings* cost of retained earnings.

weightage of each capital can be calculated by= the amount of specific capital/ total capital.

suppose if a firm have total capital of $1000, with combinations of equity $500, debenture capital of $200, term loans of $100 and retained earnings of $200.

the weights can be calculated by

weight of equity= (500/1000)*100= 50%

weight of debenture capital= 200/1000= 20%

weight of term loans= 100/1000= 10%

weight of retained earnings= 200/1000= 20%

the next step is the weights should be multiply with each cost of capital, and when all they add together you can know the firm's weighted average cost of capital

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