Radio One Hcs

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

2. Beta for mercury is calculated by comparison with the companies having similar debt/equity ratio (25%). This beta is used in the calculation of cost of equity afterwards. The equity beta comes out to be 1.12.

We assume that risk free rate (Rf) equals rate of long-term Treasury Bonds (as the project’s life is 10 years), so Rf = 9.5%.

Finally we calculate the WACC. The formula is leveraged beta * (cost of capital) + Debt to capital * (cost of debt) * (1-tax rate). Then we get for the U.S. WACC= 6.48% and for Pakistan WACC= 15.93%.

Cost of Debt. In Item 8 of Boston Beer’s 2014 10k, the interest rate of the company’s only note is fixed at an annual rate of 4.25%. We take this rate as the cost of debt (Boston Beer Co. Inc.).

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

Given these approximations, the CAPM model would total the risk-free rate and the market risk premium times beta to arrive at a cost of equity of 9.68%, which reflects the investors’ expected return from investing in shares of the company.

I used WACC as the discount factor, we expect the rate of return to be higher than it, the same at least. The WACC reflects the average risk and overall capital structure of the entire firm [2]. It’s the required return and it presents how much the company pays for the capital it finances. In this case, the cost of equity is 10.33%, the cost of debt is 6.50%. I calculated WACC using those numbers and got a result of 8.49%.

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.

The Equity beta for the whole company and for the commercial division is calculated in the appendix.

Moving forward, we must calculate the cost of debt. The cost of debt is the rate that a company pays on its current liability. This can be calculated before or after tax. For the purpose of this paper, the cost of debt will be determined by the type of long term rating the company has. According to Moody’s (n.d.), Molson Coors’ is Baa2 (as shown in the chart below) as of April 26, 2012.

Our WACC is almost constantly these years – around 5.50% -- via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and growth rate affect enterprise value and equity value.

c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?

The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of