Weighted Average Cost of Capital

Weighted Average Cost of Capital

Description
Research Baker Hughes Inc. and complete a 5 page paper with the following instructions and guidelines
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1. Evaluate the risk profile of a firm, and examine the sources of risk.
2. Analyze the capital structure of the firm for an investment banking firm to determine if this company is
suitable for bond or equity investment.
3. Examine the dividend policy and advise whether dividend policy relates to industry and competition
4. Provide one method to restructure capital and estimate potential new value with an example of firm with
similar capital structure.
5. Find S&P 500 firm and estimate the WACC (DGM and CAPM method)
o Must have .5% dividend yield or higher
o Must include preferred stock if issued
o Must have 2 or more bonds outstanding
As with current stock prices, there are hundreds of sources from which to collect current and accurate
information on corporate bonds. For those who are unable to locate any of these on your own, please use below
links in addition or as an alternative to the Bloomberg terminal.
http://www.morningstar.com/bonds.html
https://screener.finance.yahoo.com/bonds.html
In addition, any student can contact the selected company, look up the bond information in their annual report or
contact any bank or brokerage firm which trade bonds (nearly all do) to obtain the data. For grading purposes, I
will be validating the report using the Bloomberg terminal, but accurate data is available for free from hundreds
of alternative sources for those with access to the internet and a search engine.
You must use market prices to estimate cost of debt and cost of equity to complete the project. This is why you
must look up all bonds issued by a corporation and collect the current price of the bonds.
o General presentation (8?12 minutes) = 25%
o Clarity of ideas = 25%
o Recommendations = 25%
o Identifying risks = 25%
o Total = 100%
o Let the above grading rubric guide you as you complete the WACC project. Below are short descriptions of
each category.
o Accurate = Is the information accurate and verifiable? Does the data used in the calculation of the WACC
match what is the real data for the company? Calculations for Rd, Re, Rp, Wd, We and Wp will be verified.
o Organization = Is the information presented in an organized manner? Can a reader find specific information
quickly? Or is the information hidden from quick consumption?
o Realistic = Is a motivation for why the company requires investment banking services presented and make
sense? A good example may be a pharmaceutical company may want to raise money in the debt market to buy
out a competitor or supplier, etc. A bad example may be Apple, who has billions of dollars of cash and may be
difficult to motivate why they are trying to raise capital at this point.
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o Comprehensive = Is any specific information missing from the analysis? What was left out of the project hat
may significantly impact the calculation of WACC?
o Informative = What did the reader learn from the analysis? This is not designed to be a book report,
regurgitation what can be found by Google?ing an S&P 500 company. Trillions of dollars in bonds and equities
are issued and traded every year for millions of reasons. This project only asked to indentify one reason for one
company to use investment banking services

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