Read ‘Corporate Finance,’ Berk and DeMarzo, Chapter 12; Review relevant class notes. Working individually, answer the questions below. Fill the shaded blank cells in the accompanying Excel template spreadsheet. Be sure to perform calculations by using formulas that refer to the collected data in the same file. Upload the Excel file with your work to Canvas. Our goals: You work in Nordstrom Inc.’s (NYSE: JWN) corporate finance and treasury department and have just been assigned to the team estimating Nordstrom’s WACC. You must estimate the company’s WACC in preparation for a team meeting in one week. You quickly realize that the information you need is readily available online. 1. Cost of debt (20 points) a) Before-taxcostofdebt To get the firm’s before-tax cost of debt, you will need the yield to maturity on its existing long-term bonds. Go to finra-markets.morningstar.com. Under “Market Data,” select “Bonds.” Under “Search,” click “Corporate,” and type the company’s name. A list of the firm’s outstanding bond issues will appear. Bond issues may be listed on multiple pages. Assume that the firm’s policy is to use the expected return on its noncallable long-term obligations as its cost of debt. Find the noncallable bond issue with the longest time to maturity and non-missing reported yield. (Yields to maturity are reported in the last column titled “Yield.” Make sure the issue you choose doesn’t have “Yes” in the column titled “Callable.”) Collect the yield and maturity date for your chosen bond issue. b) Corporatetaxrate Go to finance.yahoo.com. In the search box, type the company’s ticker symbol and press enter. Then click “Financials” and select “Income Statement.” Collect the firm’s income tax expense and income before tax. Calculate the firm’s effective tax rate by dividing the income tax expense by the income before tax. c) After-tax cost of debt Using the firm’s tax rate, calculate its after-tax cost of debt. 2. Market value of debt (20 points) To get the firm’s market value of its existing long-term debt, you will need the market value (that is, dollar amount outstanding) of each bond issue. Read: Prepare: We will practice estimating the weighted average cost of capital (WACC) for an actual firm using the concepts and techniques introduced in the course. Page 1 of 2 FINC 3420 – Intermediate Corporate Finance Prof. Katya Emm a) Marketvalueofeachbondissue Returning to the web page that lists the firm’s outstanding bond issues. To get the market value of each bond issue, click on the issuer name in the first row. This brings up a web page with all of the information about the bond issue. Scroll down until you find “Amount Outstanding” on the right side. Note that this amount is quoted in thousands of dollars (e.g., $50,000 means $50,000,000, i.e., $50 million). Collect the amount outstanding of each bond issue and record it along with the corresponding maturity date in the second worksheet of your Excel file. Do so for each issue. b) Marketvalueofdebt Calculate the total amount outstanding of all the bond issues. This is the market value of the firm’s long-term debt. 3. Cost of equity (20 points) a) Risk-freerate Go to federalreserve.gov/releases/h15/. In the “Instruments” column, you will find the yield to maturity for ten-year Treasury bonds listed as “10-year Treasury constant maturity, nominal.” Collect this yield as your risk-free rate and indicate the corresponding date for that yield. b) Beta Go to finance.yahoo.com. In the search box, type the company’s ticker symbol and press enter. Once you see the basic information for the firm, find and click “Statistics.” From the statistics, collect the firm’s Beta. c) Cost of equity Calculate the firm’s cost of equity using the Capital Asset Pricing Model (CAPM), the risk-free rate, Beta, and a market risk premium of 6%. 4. Market value of equity (10 points) Go to finance.yahoo.com. In the search box, type the company’s ticker symbol and press enter. Click “Statistics.” From the statistics, collect the firm’s share price and shares outstanding. Calculate the firm’s market value of equity (i.e., market capitalization) by multiplying the share price by the number of shares outstanding. 5. Market-value weights of equity and debt (10 points) Compute the weights for the firm’s equity and debt based on the market value of debt, obtained in step 2, and market value of equity, obtained in step 4. 6. WACC (20 points) Calculate the firm’s WACC using its cost of debt and cost of equity weighted by their corresponding market-value weights. Note that the firm does not have preferred stock in its capital structure.
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