Case study-AW27

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1.A recent Value Line report for Coca-Cola Company (its ticker symbol = KO) is provided in the course packet.  (It is also included on the e-Learning site.)  Use this information along with information from Bloomberg, Yahoo! Finance, Morningstar, and S&P Net Advantage (available on the UF Business Library site) to answer the following questions:(5 points each)


A) What is the percentage of debt (to be used in the WACC equation) in the firm’s capital structure? Assume that the book value of the firm’s debt approximates its market value and ignore other liabilities and deferred long-term liability charges.  If 6/30/16quarterly balance sheet data are unavailable, use the 3/31/16 quarterly balance sheet data.  (Provide detailed support for your answer including the source(s) of data used.)


B) What is the percentage of equity (to be used in the WACC equation) in the firm’s capital structure? (Provide detailed support for your answer including the source(s) of data used.)


C) What is the firm’s before-tax cost of debt, rd? (Provide detailed support for your answer including the source(s) of data used.  Try looking at which gives a detailed listing of a firm’s bond issuesor using the corporate bond screener in S&P Net Advantage.  Consider only non-callable debt with maturities of at least (or as close to) 10 years.)


D) What is the firm’s cost of equity, rs? Assume the market risk premium is 6%.  (Provide detailed support for your answer including the source(s) of data used.)


E) What is the firm’s WACC? Be sure to use the firm’s 2016 projected tax rate and not the firm’s past tax rate in this calculation.  (Provide detailed support for your answer.)


F) Coke’s management is considering a new independent project with an IRR of 7%; it has the same risk as the firm’s typical capital budgeting project. Should the firm accept the project?  Explain your answer.

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2.Sunshine Apparel Inc. (SAI) has two divisions, a business apparel division and a leisure apparel division.  The risk-free rate is 3%, the market risk premium is 4.5%, and the levered beta on its stock is 1.25.  Using the CAPM, the firm’s cost of equity is calculated as 8.625%.  The firm’s tax rate is 35% and its before-tax cost of debt is 5%.  Since the firm’s capital structure consists of 30% debt and 70% equity, its WACC is calculated as 7.0125%.


SAI has two main competitors in the leisure apparel business, Company A and CompanyB.  SAI’s CFO has collected the following information regarding its competitors


Leisure Apparel Company A Leisure Apparel Company B
Levered beta 1.35 1.65
% of debt in capital structure 35% 50%
% of equity in capital structure 65% 50%
Tax rate 35% 35%
% of revenue from leisure apparel 100% 100%



SAI’s CFO is interested in calculating a WACC for projects in its business apparel division.  50% of SAI’s revenue, profit, and assets come from the business apparel division, while the other 50% comes from the leisure apparel division.  The company assumes that projects in both divisions are financed with 30% debt and 70% equity.  What would you estimate to be the WACC for a typical business apparel project for SAI?  (25 points)


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