Part A: Weighted Average Cost of Capital (WACC) 1. Go to http://thatswacc.com/[1
ID: 2758600 • Letter: P
Question
Part A: Weighted Average Cost of Capital (WACC)
1. Go to http://thatswacc.com/[1] and enter the ticker symbol for the stock you selected and click on the tab entitled “Calculate WACC.”
2. Complete the following tables:
From the http://thatswacc.com/ results for your company:
CAPM Components
3. Using data in the table confirm the accuracy of the site’s WACC calculation:
Part B: Dividend Payout and Growth Ratios:
Internal growth rate = (ROA RR) / [1-(ROA RR)]
where RR = Retention ratio = (Addition to retained earnings)/Net income
The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings) to increase assets
Sustainable growth rate= (ROE RR) / [1-(ROE RR)]
If the firm uses retained earnings to support asset growth, the firm’s capital structure will change over time, i.e., the share of equity will increase relative to debt
To maintain the same capital structure managers must use both debt and equity financing to support asset growth
The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio
1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:
ROA= 8.16% RR= .22 Net Income for December 2015 = 7,351,000
= (ROA RR) / [1-(ROA RR)]
= (.0816 .22) / [1-(.0816 .22)]
= .0182801655 or 1.83%
2. Calculate the firm’s sustainable growth rate for the last fiscal year:
ROE= 28.77% RR= .22 Net Income for December 2015 = 7,351,000
= (ROE RR) / [1-(ROE RR)]
= (.2877 .22) / [1-(.2877 .22)]
= .067570828 or 6.76%
Part C
1. Consider your results for Parts A and B. If the chosen firm grows at its internal growth rate, increasing assets only with its retained earnings, how will this likely affect its WACC? Show calculations.
Hi Everyone, I just need help on Part C question 1. I'm confused about the calculations they are asking for to the show the work needed to answer that question. If someone could explain their calculations for the question, I would really appreciate it!
Above I listed all of my work and calculations that I've done for Part A and Part B.
Name of Company/Stock The Coca Cola Company Ticket Symbol KOExplanation / Answer
If the firm grows at ist internal growth rate of 1.83%, the its reatined earinings will also grow by 1.83%.
So the firm will buy assest only with the amount of retained earnings. So the business will not take additional debt or rasied additional equity capital to raise equity. Hence the company uses its own retained earnings to purchase assets.
There is no cost to the retained earnings and hence cost of retained earnings is 0.
There is no increase or decerase in the weight of debt or retained earnings and these weights remain the same. They do not increase as new debt or equity is not being raised.
Hence the WACC will remain unchanged by the firm uses retained earnings to purchase the assets.