Hi can anyone fix this HW problem. This is was done by you guys, however, I'm willing to pay for another HW solution different than this one, and by different tutor who did this HW. I also attached my professor comment. thanks
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Thank you for your submission. Here are my comments:
The dividend numbers used are inconsistent with Yahoo website.
We are in March 2022, not December 2020. MCD price in the last two weeks was between $230 and $250, but not $211.56 as you mention.
We are in 2022, there are less than 6 years remaining to maturity in January 2028
In the last two weeks the bond was traded between 115 and 119, you use the issue price instead of a current price
A discussion of how much confidence you have in your answer is missing. The assignment asked you about limiting assumptions that you made, if any.
WACC Practice Template WACCSolution Legend Value given in problem Formula/Calculation/Analysis required Given 31-Dec-21 Liabilities and Owners' Capital Balance Sheet (Book Values)Invested Capital (Market Values) Current Liabilities Accounts payable$ 17,550,000 Notes payable10,000,00010,000,000 Other current liabilities`22,266,000 Total current liabilities$ 49,816,000$ 10,000,000 Long-term debt (6.5% interest paid semiannually, due in 5 years)$ 650,000,000$ 714,653,161 Total liabilities$ 699,816,000$ 724,653,161 Owners' Capital Common stock (at $1 par value per share)$ 20,000,000 Paid-in-capital200,025,000 Accumulated earnings255,000,000 Total owners' capital$ 475,025,000$ 1,400,000,000 Total liabilities and owners' capital$ 1,174,841,000$ 2,124,653,161 US Treasury Bond Yield2.00% Estimated Market or Equity Risk Premium4.50% Current Share Price$ 70.00 Market value of owners' equity Current yield on the firm's long-term debt4.25% Current yield on the firm's short-term notes3.00% Dollar value of short term notes outstanding$ 10,000,000 Corporate tax rate21% Solution a. What are company's capital structure weights? Enterprise value = Market capitalization + Debt Notes payable / Enterprise Value Long-Term Debt / Enterprise Value Equity / Enterprise Value b. What is company's cost of equity capital using the CAPM? After-Tax Cost of Sources of Capital Notes Payable (after-taxes) Long-term Debt (after-taxes) Levered equity beta1.20 Equity (using the CAPM) c. What is company's WACC? Source of Capital Capital Structure Weight (Proportion) After-Tax CostWeighted After-Tax Cost Notes Payable Long-term Debt Equity WACC LEO Inc. has the balance sheet as shown below. Recently the yield on bonds similar to the ones that company has had increased to 4.25%, so that the market value of the bonds is now about $715 million The rate on company' short-term notes is equal the market's rate on these notes, which is 3%. a) What are the company's total invested capital and capital structure weights? b) What is the company's cost of equity according to CAPM, if the U.S. T-bond yield is 2.00 %, the long-term market risk premium is 4.5% and the company's levered beta is 1.2? c) What is the company's WACC? WACC Practice Solution WACCSolution Legend Value given in problem Formula/Calculation/Analysis required Given 31-Dec-21 Liabilities and Owners' Capital Balance Sheet (Book Values)Invested Capital (Market Values) Current Liabilities Accounts payable$ 17,550,000 Notes payable10,000,00010,000,000 Other current liabilities`22,266,000 Total current liabilities$ 49,816,000$ 10,000,000 Long-term debt (6.5% interest paid semiannually, due in 2017)$ 650,000,000$ 714,653,161 Total liabilities$ 699,816,000$ 724,653,161 Owners' Capital Common stock (at $1 par value per share)$ 20,000,000 Paid-in-capital200,025,000 Accumulated earnings255,000,000 Total owners' capital$ 475,025,000$ 1,400,000,000 Total liabilities and owners' capital$ 1,174,841,000$ 2,124,653,161 US Treasury Bond Yield2.00% Estimated Market or Equity Risk Premium4.50% Current Share Price$ 70.00 Market value of owners' equity1,400,000,000 Current yield on the firm's long-term debt4.25% Current yield on the firm's short-term notes3.00% Dollar value of short term notes outstanding$ 10,000,000 Corporate tax rate21% Solution a. What are company's capital structure weights? Enterprise value = Market capitalization + Debt$ 2,124,653,161 Notes payable / Enterprise Value0.47% Long-Term Debt / Enterprise Value33.64% Equity / Enterprise Value65.89% b. What is company's cost of equity capital using the CAPM? After-Tax Cost of Sources of Capital Notes Payable (after-taxes)2.37% Long-term Debt (after-taxes)3.36% Levered equity beta1.20 Equity (using the CAPM)7.40% c. What is company's WACC? Source of Capital Capital Structure Weight (Proportion) After-Tax CostWeighted After-Tax Cost Notes Payable0.47%2.37%0.00011 Long-term Debt33.64%3.36%0.01129 Equity65.89%7.40%0.04876 WACC6.0166% LEO Inc. has the balance sheet as shown below. Recently the yield on bonds similar to the ones that company has had increased to 4.25%, so that the market value of the bonds is now about $715 million The rate on company' short-term notes is equal the market's rate on these notes, which is 3%. a) What are the company's total invested capital and capital structure weights? b) What is the company's cost of equity according to CAPM, if the U.S. T-bond yield is 2.00 %, the long-term market risk premium is 4.5% and the company's levered beta is 1.2? c) What is the company's WACC? WACC - Cost of equity Estimating cost of equity using DGM Estimating Dividend Growth YearDividend (from Yahoo)Growth1+g Year 1$1.23 Year 2$1.305.69%1.0569 Year 3$1.364.62%1.0462 Year 4$1.435.15%1.0515 Year 5$1.504.90%1.0490<-- =b8/b7-1=""><-- =b8/b7="" 5.087%="" 5.086%=""><-- =average(c5:c8)=""><-- =product(d5:d8)^(1/4)-1="" current="" price="" author:="" author:="" from="" yahoo="" $25.00="" expected="" dividend="" $1.58=""><-- =b8*(1+estimated_growth)="" growth="" estimate="" 5.087%=""><-- =average(c10:d10)="" cost="" of="" equity="" 11.39%=""><-- =expected_dividend/current_price+estimated_growth="" estimating="" cost="" of="" equity="" using="" capm="" (sml)="" item="" source="" value="" risk="" free="" rate="" treasury="" yield="" curves="" 3.55%="" mrp="" damodaran="" 4.62%="" beta="" yahoo="" 1.44="" cost="" of="" equity="" 10.20%=""><-- =risk_free+beta*mrp="" cost="" of="" equity="" used="" in="" wacc="" can="" be="" one="" of="" the="" values="" calculated,="" average,="" or="" some="" other="" number,="" subjectively="" adjusted="" cost="" of="" equity="" used="" 11.39%="" http://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data="yieldhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.htmlhttp://finance.yahoo.com/" wacc="" -="" cost="" of="" debt="" estimating="" cost="" of="" debt="" most="" recently="" issued="" bond="" data,="" or="" bond="" with="" longest="" maturity="" source="" finra-morningstar="" maturity="" 25="" years="" coupon="" rate="" 4.50%="" face="" value="" $="" 100.00="" price="" $="" 98.87="" payments="" 2="" per="" year="" number="" of="" payments="" 50="" pv="" $="" (98.87)="" payment="" $="" 2.25="" future="" value="" $="" 100.00="" per="" period="" rate="" 2.288%="" cost="" of="" debt="" (annual)="" 4.576%="" http://finra-markets.morningstar.com/marketdata/default.jsp="" wacc="" -="" combined="" together="" cost="" of="" equity="" 11.39%=""><-- =costofequity="" cost="" of="" debt="" 4.58%=""><-- =costofdebt="" item="" source="" value="" value="" of="" debt="" sec="" $="" 7.50="" billion="" market="" cap="" yahoo="" $="" 26.70="" billion="" tax="" rate="" irs="" 21.00%="" wacc="" 9.69%=""><-- =debt/(debt+equity)*costofdebt*(1-taxrate)+equity/(debt+equity)*costofequity http://www.sec.gov/edgar/searchedgar/companysearch.htmlhttp://finance.yahoo.com/http://www.irs.gov/publications/p542/ar02.html wacc assignment template estimating cost of equity using dgmsolution legend estimating dividend growthvalue given or to be downloaded from data website yeardividend (from yahoo) author: if your company does not pay dividends, check this module's faq growth1+gformula/calculation/analysis required year 1$3.61 year 2$3.836.09%1.0609 year 3$4.199.40%1.0940 year 4$4.7312.89%1.1289 year 5$5.046.55%1.0655 average8.734%8.700% current price (as on dec 31, 2020) author: from yahoo finance or other sources$211.56 expected dividend$5.48 growth estimate8.717% cost of equity11.31% estimating cost of equity using capm (sml) itemsourcevalue risk free ratetreasury yield curves1.65% mrpdamodaran 4.84% betayahoo0.61 cost of equity4.60% cost of equity used in wacc can be one of the values calculated, average, or some other number, subjectively adjusted cost of equity used11.31% estimating cost of debt most recently issued bond data, or bond with longest maturity sourcefinra-morningstar maturity11 coupon rate6.38% face value$ 100.00 price$ 99.64 payments2 number of payments22 pv$ (99.64) payment$ 3.19 future value$ 100.00 per period rate3.211% cost of debt (annual)6.421% itemsourcevalue value of debtsec$ 37,440.40 market capyahoo$ 179,003.00 tax rateirs21.00%you may assume 21% wacc10.23% http://www.sec.gov/edgar/searchedgar/companysearch.htmlhttp://finance.yahoo.com/http://www.irs.gov/publications/p542/ar02.htmlhttp://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yieldhttp://pages.stern.nyu.edu/~adamodar/new_home_page/datafile/histretsp.htmlhttp://finance.yahoo.com/http://finra-markets.morningstar.com/marketdata/default.jsp sheet2 g ice div k g k div ice e e + = - = pr ) ( pr 1 1 g ice div k gk div ice e e pr )( pr 1 1 background of the entity: mcdonald corporation is a us based fast food organization which was founded in 1940 as a restaurant by richard and maurice mcdonald. the company is listed on new york stock exchange and is headquartered at chicago. the company is serving more than 38,000 locations across the globe and the major products of the company are hamburgers, soft drinks, french fries, desserts and wraps etc. the company is having revenue more than $21 billion and the asset base is $32.81 million. wacc and its calculation: wacc is the weighted cost of various sources of finance based on its funding and its associated costs. we have calculated wacc of the corporation based on equity and debt funding raised. firstly, we have calculated cost of equity using dividend growth model and capm but we have considered the cost of equity based on dividend growth model. under dividend growth model, firstly we have calculated the dividend from the year 2015 to 2020 based on latest annual financial statements available and have calculated growth rate in dividend. the calculation of growth rate is as below: year dividend (from yahoo) growth 1+g year 1 $3.61 year 2 $3.83 $3.83/$3.61-1= 6.09% 1.0609 year 3 $4.19 $4.19/ $3.83 -1= 9.40% 1.0940 year 4 $4.73 $4.73/ $4.19 -1= 12.89% 1.1289 year 5 $5.04 $5.04/ $4.73 -1= 6.55% 1.0655 after calculation of growth rate in dividend for 5 years we have calculated average growth rate which is 8.734% and the average of 1+ growth rate is 8.70% for 5 years. further, the growth estimate has been calculated by averaging the dividend growth rate and 1+ growth rate which is 8.717%. the current market price as on closing date i.e. december 31, 2020 is $211.56 per share and after considering average growth rate the next expected dividend is $5.48 per share. the cost of equity has been calculated as below: cost of equity = expected dividend/ current price + growth rate = $5.48/ $211.56 + 8.717% = 11.31% we have also calculated cost of equity using capm method under which the risk free rate has been considered as 1.65% from us treasury website as on 31.12.2020 for 30 years treasury bonds and the selected rate is daily treasury par yield curve rates. the market risk premium for year 2020 has been considered 4.84% stern website and from historical risk premium column. the beta of the company is 0.60 times which has been considered from yahoo finance. as per capm the cost of equity is 4.60% (1.65% + 4.84% * 0.61 times) but we have used the dividend growth model as basis because in case of growing companies, the dividend growth model is considered as best for cost of equity calculation. after calculation of cost of equity, we have calculated cost of debt. the estimated cost of debt is 6.421% and the data have been calculated from finra morningstar website. we have considered the latest corporate bonds issued by the entity and the maturity period of bond is 11 years. the coupon rate of such bonds is 6.375% and have been issued at $99.64 per unit having face value 100 per =debt/(debt+equity)*costofdebt*(1-taxrate)+equity/(debt+equity)*costofequity="" http://www.sec.gov/edgar/searchedgar/companysearch.htmlhttp://finance.yahoo.com/http://www.irs.gov/publications/p542/ar02.html="" wacc="" assignment="" template="" estimating="" cost="" of="" equity="" using="" dgm="" solution="" legend="" estimating="" dividend="" growth="" value="" given="" or="" to="" be="" downloaded="" from="" data="" website="" year="" dividend="" (from="" yahoo)="" author:="" if="" your="" company="" does="" not="" pay="" dividends,="" check="" this="" module's="" faq="" growth="" 1+g="" formula/calculation/analysis="" required="" year="" 1="" $3.61="" year="" 2="" $3.83="" 6.09%="" 1.0609="" year="" 3="" $4.19="" 9.40%="" 1.0940="" year="" 4="" $4.73="" 12.89%="" 1.1289="" year="" 5="" $5.04="" 6.55%="" 1.0655="" average="" 8.734%="" 8.700%="" current="" price="" (as="" on="" dec="" 31,="" 2020)="" author:="" from="" yahoo="" finance="" or="" other="" sources="" $211.56="" expected="" dividend="" $5.48="" growth="" estimate="" 8.717%="" cost="" of="" equity="" 11.31%="" estimating="" cost="" of="" equity="" using="" capm="" (sml)="" item="" source="" value="" risk="" free="" rate="" treasury="" yield="" curves="" 1.65%="" mrp="" damodaran="" 4.84%="" beta="" yahoo="" 0.61="" cost="" of="" equity="" 4.60%="" cost="" of="" equity="" used="" in="" wacc="" can="" be="" one="" of="" the="" values="" calculated,="" average,="" or="" some="" other="" number,="" subjectively="" adjusted="" cost="" of="" equity="" used="" 11.31%="" estimating="" cost="" of="" debt="" most="" recently="" issued="" bond="" data,="" or="" bond="" with="" longest="" maturity="" source="" finra-morningstar="" maturity="" 11="" coupon="" rate="" 6.38%="" face="" value="" $="" 100.00="" price="" $="" 99.64="" payments="" 2="" number="" of="" payments="" 22="" pv="" $="" (99.64)="" payment="" $="" 3.19="" future="" value="" $="" 100.00="" per="" period="" rate="" 3.211%="" cost="" of="" debt="" (annual)="" 6.421%="" item="" source="" value="" value="" of="" debt="" sec="" $="" 37,440.40="" market="" cap="" yahoo="" $="" 179,003.00="" tax="" rate="" irs="" 21.00%="" you="" may="" assume="" 21%="" wacc="" 10.23%="" http://www.sec.gov/edgar/searchedgar/companysearch.htmlhttp://finance.yahoo.com/http://www.irs.gov/publications/p542/ar02.htmlhttp://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data="yieldhttp://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.htmlhttp://finance.yahoo.com/http://finra-markets.morningstar.com/MarketData/Default.jsp" sheet2="" g="" ice="" div="" k="" g="" k="" div="" ice="" e="" e="" +="-" =="" pr="" )="" (="" pr="" 1="" 1="" g="" ice="" div="" k="" gk="" div="" ice="" e="" e="" ="" ="" ="" pr="" )(="" pr="" 1="" 1="" background="" of="" the="" entity:="" mcdonald="" corporation="" is="" a="" us="" based="" fast="" food="" organization="" which="" was="" founded="" in="" 1940="" as="" a="" restaurant="" by="" richard="" and="" maurice="" mcdonald.="" the="" company="" is="" listed="" on="" new="" york="" stock="" exchange="" and="" is="" headquartered="" at="" chicago.="" the="" company="" is="" serving="" more="" than="" 38,000="" locations="" across="" the="" globe="" and="" the="" major="" products="" of="" the="" company="" are="" hamburgers,="" soft="" drinks,="" french="" fries,="" desserts="" and="" wraps="" etc.="" the="" company="" is="" having="" revenue="" more="" than="" $21="" billion="" and="" the="" asset="" base="" is="" $32.81="" million.="" wacc="" and="" its="" calculation:="" wacc="" is="" the="" weighted="" cost="" of="" various="" sources="" of="" finance="" based="" on="" its="" funding="" and="" its="" associated="" costs.="" we="" have="" calculated="" wacc="" of="" the="" corporation="" based="" on="" equity="" and="" debt="" funding="" raised.="" firstly,="" we="" have="" calculated="" cost="" of="" equity="" using="" dividend="" growth="" model="" and="" capm="" but="" we="" have="" considered="" the="" cost="" of="" equity="" based="" on="" dividend="" growth="" model.="" under="" dividend="" growth="" model,="" firstly="" we="" have="" calculated="" the="" dividend="" from="" the="" year="" 2015="" to="" 2020="" based="" on="" latest="" annual="" financial="" statements="" available="" and="" have="" calculated="" growth="" rate="" in="" dividend.="" the="" calculation="" of="" growth="" rate="" is="" as="" below:="" year="" dividend="" (from="" yahoo)="" growth="" 1+g="" year="" 1="" $3.61="" ="" ="" year="" 2="" $3.83="" $3.83/$3.61-1="6.09%" 1.0609="" year="" 3="" $4.19="" $4.19/="" $3.83="" -1="9.40%" 1.0940="" year="" 4="" $4.73="" $4.73/="" $4.19="" -1="12.89%" 1.1289="" year="" 5="" $5.04="" $5.04/="" $4.73="" -1="6.55%" 1.0655="" after="" calculation="" of="" growth="" rate="" in="" dividend="" for="" 5="" years="" we="" have="" calculated="" average="" growth="" rate="" which="" is="" 8.734%="" and="" the="" average="" of="" 1+="" growth="" rate="" is="" 8.70%="" for="" 5="" years.="" further,="" the="" growth="" estimate="" has="" been="" calculated="" by="" averaging="" the="" dividend="" growth="" rate="" and="" 1+="" growth="" rate="" which="" is="" 8.717%.="" the="" current="" market="" price="" as="" on="" closing="" date="" i.e.="" december="" 31,="" 2020="" is="" $211.56="" per="" share="" and="" after="" considering="" average="" growth="" rate="" the="" next="" expected="" dividend="" is="" $5.48="" per="" share.="" the="" cost="" of="" equity="" has="" been="" calculated="" as="" below:="" cost="" of="" equity="expected" dividend/="" current="" price="" +="" growth="" rate="$5.48/" $211.56="" +="" 8.717%="11.31%" we="" have="" also="" calculated="" cost="" of="" equity="" using="" capm="" method="" under="" which="" the="" risk="" free="" rate="" has="" been="" considered="" as="" 1.65%="" from="" us="" treasury="" website="" as="" on="" 31.12.2020="" for="" 30="" years="" treasury="" bonds="" and="" the="" selected="" rate="" is="" daily="" treasury="" par="" yield="" curve="" rates.="" the="" market="" risk="" premium="" for="" year="" 2020="" has="" been="" considered="" 4.84%="" stern="" website="" and="" from="" historical="" risk="" premium="" column.="" the="" beta="" of="" the="" company="" is="" 0.60="" times="" which="" has="" been="" considered="" from="" yahoo="" finance.="" as="" per="" capm="" the="" cost="" of="" equity="" is="" 4.60%="" (1.65%="" +="" 4.84%="" *="" 0.61="" times)="" but="" we="" have="" used="" the="" dividend="" growth="" model="" as="" basis="" because="" in="" case="" of="" growing="" companies,="" the="" dividend="" growth="" model="" is="" considered="" as="" best="" for="" cost="" of="" equity="" calculation.="" after="" calculation="" of="" cost="" of="" equity,="" we="" have="" calculated="" cost="" of="" debt.="" the="" estimated="" cost="" of="" debt="" is="" 6.421%="" and="" the="" data="" have="" been="" calculated="" from="" finra="" morningstar="" website.="" we="" have="" considered="" the="" latest="" corporate="" bonds="" issued="" by="" the="" entity="" and="" the="" maturity="" period="" of="" bond="" is="" 11="" years.="" the="" coupon="" rate="" of="" such="" bonds="" is="" 6.375%="" and="" have="" been="" issued="" at="" $99.64="" per="" unit="" having="" face="" value="" 100="">