Estimate and Forecast Changes in Bond and Stock Prices

Nike Inc. is a Fortune 500 American Multinational corporation that engages in the design, production, sales and marketing of shoes, apparels and accessories among others. Nike Inc. headquarters are in Oregon in the Portland Metropolitan area.

6.95%

Alphabet Inc.

GOOG

Alphabet Inc. is an American Multinational company, which is the parent company of Google and other subsidiaries. Alphabet Inc. a conglomerate was formed in 2015 during the corporate restructuring of Google. The list of portfolios under Alphabet Inc. Includes research, investment capital, technology, and life sciences among others. Alphabet Inc. headquarters are in Mountain View, California.

9.87%

Walmart Inc.

WMT

Walmart Inc. is a Fortune 500 American Multinational Corporation that operates a fleet of discount stores, grocery stores, and hypermarkets. It has over 11000 stores in 27 countries working in different names. Wal-Mart Inc. headquarters are in Bentonville, Arkansas.

1.28%

Tesla, Inc.

TSLA

Tesla Inc., previously known as Tesla Motor Inc. is an American automotive enterprise that was founded in 2003. Tesla Inc. specializes in the manufacture of electric cars and solar panels. The enterprise’s headquarters are in Palo, Alto California.

2.29%

Apple Inc.

AAPL

Apple Inc. is an American multinational corporation specializing in the designing, developing and selling of electronics, software and other online services. It is the manufacturer of I phone, Mac PCS, iPods and IOS among other technology products. Apple Inc. headquarters are in Cupertino, California.

6.41%

Weighted Average Cost of Capital Essay

Companies use debt and equity capital to finance their assets (Fernandez, 2015). The WACC is the average of the costs of equity and debt financing of a company’s assets. The WACC represents the computation of a firm’s cost of capital where each class of capital (debt and equity) gets weighted proportionately (Brealey, Myers, Allen & Mohanty, 2012). A company’s lenders and equity holders usually expect to receive returns for financing the operations of a company. As such, the WACC helps in determining the returns the two classes of stakeholders will receive from the company (Fernandez, 2015). The WACC can be seen merely as the opportunity cost of the risk taken by the investors (in this case the lenders and equity holders) to invest in the enterprise.

The WACC is predominantly used in capital budgeting decisions. It forms the basis from which investors make most of their choices. Investors use WACC when valuing and selecting various investment options. For example, in the discounted cash flow analysis, investors apply the WACC as the discount rate to future cash flows to obtain the net present value. In choosing investment decisions, WACC represents the minimum rate of return for which an enterprise offers a return to its stakeholders (Ehrhardt & Brigham, 2016). For example, in a hypothetical situation where an enterprise’s return is 15 % and the WACC is 10 %; this means that for every dollar unit the firm uses in the financing of its assets, it creates five cents of value. In cases where the WACC is lower than the returns of a company, investors would not invest in such a company, as the enterprise financing operations depreciate the investments made.

It is vivid from the table above that the five companies chosen have different values of WACC. One of the reasons behind the differences in the WACC values is that the five firms do not have a similar capital structure. Some enterprises especially those that are capital intensive are leveraged by default and hence have a higher cost of capital (Fernandez, 2015). The converse holds. Besides, the WACC varies in the five firms because of the differences in the risks of the projects. In instances where a company engages in highly risky projects, the expected returns are high. The WACC is also high. This slightly explains the high values of WACC in the case of Alphabet Inc. because of the entity’s high investment in R & D.

WACC Formula

WACC= Re () +Rd () (1-Tc)

In this case:

E- Represents the market value of equity;

D-represents the market value of debt;

Re- Cost of Equity;

Rd- Cost of debt;

V=E+D- Total value of an enterprise financing options;

E/V- Total percentage of financing that is through equity;

D/V- the Total portion of funding that is through debt;

Tc- Total corporate tax.

The values of D and E can be obtained from an entity’s financial statements. The value of V is obtained by adding the total amount of debt and equity. The cost of debt (Rd) is computed by first looking at the market rate at which the firm currently is paying off its debts. In cases where the firm is paying its debt at a different rate other than the market rate, estimations are usually done to arrive at the correct market rate. It is somewhat complicated computing the cost of equity (Re) directly.

Nevertheless, the cost of equity represents the amount, which an enterprise has to spend to satisfy the interests of shareholders. It is apparent if the company pays low amounts, the shareholders will withdraw their equities and invest them in other avenues where the returns are good (Fernandez, 2015). Usually, debt has the tax deductibility property, which is often to a company’s benefit. As a result, an enterprise cost of debt is the amount of interest the firm is paying on its debts less the amount it has saved because of the tax deductibility property of debt. Thus, the after-tax cost of debt is given as Rd *(1-Tc).

References

Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). PrInc.iples of corporate finance. Tata McGraw-Hill Education.

Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage Learning.

Fernandez, P. (2015). WACC: definition, misconceptions and errors.