Identify each component of the wacc formula

Assignment Help Financial Management

Reference no: EM132020374

Using the company, CVS Health

Analysis of WACC

Calculation of WACC for your company

You will need to identify each component of the WACC formula and calculate the overall WACC.

The WACC formula for a company that uses debt and equity is as follows:

WACC = % Debt * Cost of Debt * (1 - Tax Rate) + % Equity * Cost of Equity

You should use Yahoo! Finance and / or the company's most recent 10K report to identify all financial statement inputs. You can use the following guide for the inputs. The specific financial statement data are found on the relevant financial statement.

Debt = Long-term Debt + Short-term Debt (on Yahoo! this is called, "Short/Current Long Term Debt")

Equity = Market Cap. (This is on the Key Statistics page in Yahoo! Finance)

% Debt = Debt / (Debt + Equity)

% Equity = 1 - % Debt

Cost of Debt = Interest Expense / Debt

Tax Rate = Income Tax Expense / Income Before Tax

Cost of Equity: Use the CAPM equation to calculate this

Cost of Equity = Risk free rate + Beta * (Market Risk Premium)

Risk free rate: look up the yield on 10 year US Treasury bonds

Beta: This is on the Key Statistics page in Yahoo! Finance

Market Risk Premium: Assume 11% minus the risk-free rate

Interpretation of WACC for Your Company

Indicate what the WACC value you derived means for your company. What role does the WACC play for company managers when they are evaluating new projects to undertake? How would company managers and investors use the WACC for an overall company valuation analysis?

Reference no: EM132020374

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