(SOLVED) Use the required rates of return calculated in Chapter 12


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$19

Use the required rates of return calculated in Chapter 12, problem 25, to estimate the weighted-average cost of capital for the five companies. For their capital structures, go to finance.yahoo.com, enter a publicly traded company in the “Quote Lookup· box, and click “Go.” Record the “Market Cap,” which is the current market value of equity, and then click on “Balance Sheet” on the left and record the book value of debt. Estimating the yield on the debt is trickier. If you are lucky, the bonds are rated at www.moodys.com, www.dbrs.com, or www.standardandpoors.com. If you cannot find a debt rating, assume that the debt is BBBrated. Assume that each company’s debt has an average maturity of 7 years. Assume that the credit spread (that is, the extra yield over the equivalent-term government bond) for AA-rated debt is 44 basis points, for A-rated debt is 71 basis points, for BBBrated debt is 125 basis points, and for BB-rated debt is 265 basis points. (One basis point is .01 percentage points.) Add each spread to the current yield on 7-year Government of Canada bonds, found at www.bankofcanada.ca/rates/interest-rates/canadian-bonds. Assume that the companies have a 30% corporate tax rate. Now calculate the WACCs.

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