Can you let me know if I answered questions 1-5 correctly and if not, let me kno
ID: 2720055 • Letter: C
Question
Can you let me know if I answered questions 1-5 correctly and if not, let me know what the answer and formula is please?
1. Choose a publicly traded company that has relatively simple and streamlined financial statements. Ralph Lauren 2. Look up the company’s most recent financial statements on at finance.yahoo.com. Based on the most recent balance sheet, what percentage of the company is debt-based and what percentage is equity-based? 3. Look up the company’s historical prices. Find the average annual return on the stock. 4. Find the interest expense on the income statement and divide by long-term debt. What does it look like the company’s interest rate on debt is? 5. Use your answer from #3 as cost of equity, your answer from #4 as cost of debt, and the percentages from part 2 as weights. What is the WACC? http://finance.yahoo.com/q/bs?s=RL+Balance+Sheet&annual - Link to Balance Sheet for Ralph Lauren Question 2 As of Sept 26, 2015 Percentage of Equity and debt based Total Assets 6,443,000 Total Liabilities 2,632,000 Debt/Equity Total Liabilities/Total Assests 0.408505 Percentage % Debt-Based 0.41 41 Equity Based 0.59 59 41% is debt based and 59 is equiry based Percentage Questioon 3 Historical Prices Jan 2 2014 171.42 Dec 31 2014 182.97 11.55 0.067378369 0.0673 Jan 2 2013 147.23 Dec 31 2013 172.6 25.37 0.172315425 0.1723 Jan 3 2012 131.51 Dec 31 2012 145.12 13.61 0.103490229 0.1034 Total 0.343 Annual Average Rate of Return on Stock 0.114333333 0.1143 Question 4 Interest expenses in year 2015 4000 Interest Rate on Debt Percentage Long Term Debt 597000 0.006700168 0.67 Question 5 Cost of Equity Total Equity Cost of Debt Total Debt Corporate Tax Rate 0.1143 3811000 0.67 2632000 0.41 WACC = E/V × Re + D/V × Rd × (1 - Tc) 0.2291Explanation / Answer
In question 3, we need to compute average annual return so we first need to compute annual return then average return:
Annual % return = Dollar return/ Beginning price
Annual % return (2014) =11.55/171.42 =6.74%
Annual % return (2013) =25.37/147.23 =15.87%
Annual % return (2012) =13.61/131.51 = 10.35%
Average return = ( 6.74% +15.87% +10.35%)/3
=10.99%
For Question 5, you just need to correct cost of equity that is 10.99%.
Everything else is perfect.