Target Corporation: Weighted Average Cost of Capital
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Code : FCF0015
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Region : US
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Understanding Weighted Average Cost of Capital "In such cases, firms use the Weighted Average Cost of Capital (WACC)," replied Dr. Martin. "Sir, what is WACC?" asked the students. "WACC is the expected average cost of serving the existing capital. You get it by multiplying the cost of each source with its weight in capital and adding up the former results," replied Dr. Martin... Choosing a Company "We will do an exercise to get a better understanding of WACC," said Dr. Martin. "We will take up real time data of a company and find out its WACC." "Which company, Sir?" asked Elly. "Any suggestions?" Dr. Martin asked the students in turn to select a company. "Sir, shall we take General Electric Company?" asked Matthew. "No Sir, that is too complex as it is a conglomerate company (i.e. company within companies)... Setting Parameters "Before you start, I would like to set some parameters. Use Capital Assets Pricing Model(CAPM) to calculate the cost of equity and for market return take at least 15 years' monthly returns of S&P 500. Use 10 years' United Sates government bond yield, which was around 3.71% in January 2010, as risk free rate and use 3 years’ monthly return of Target Corporation for beta calculation," said Dr. Martin... |
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