1.The Weighted Average Cost of Capital (WACC) for a firm can be calculated or fo

Question

1.The Weighted Average Cost of Capital (WACC) for a firm can be calculated or found through research. Select two firms in the same industry. The industry may be that in which you currently work or it may be an industry in which you are interested. Calculate or find the WACC for the two firms. How do the WACCs compare? Are the WACCs what you would expect? What causes the differences between the two firms' WACCs? 2.what is the most difficult part of calculating WACC? 3.Our second discussion topic concerns the calculation of stock values using the Capital Asset Pricing Model (CAPM). We will start with a discussion of risk and work towards practical application of the model. The textbook provides a list of betas for a selection of stocks. Choose a few firms from that list and discuss whether the betas are what you would expect. Be sure to explain why or why not. 4. Sprint Corporation (NYSE) is showing promising figures in terms of its rankings among the major telecommunication giants like AT&T, Verizon and T-Mobile, with the latest release of metrics that reflect higher than expected rating regarding calls and texting reliability and performance and has received numerous other first, second standing in overall reliability, speed and data and texting network capability. Sprint Corp (NYSE:S) Weighted Average Cost Of Capital (WACC) 7.74% Here are the current Sprint Stock Ratios according to Yahoo Finance: Sprint Corporation (S) -NYSE 4.42 Down 0.04(0.90%) Jun 5, 4:00PM EDT After Hours: 4.43 Up 0.01 (0.23%) Jun 5, 7:47PM EDT SPRINT Corporation (S) Beta: -1.355 52wk Range: 3.79 - 8.96 Volume: 12,789,376 Market Cap: 17.53B EPS (ttm): -0.85 In the past twelve month’s price to sales ratio recorded as 0.54 and price to cash ratio remained 4.48

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Question 1

I havechosenthe telecommunication industry. From research, MTS (or MTC in Russian for) is thelargest multinational mobileoperator in Russia. MTC has an equityratio of 46.1%, a debtratio of 53.9%, a cost of debt of 7.8% and a cost of equity of 16.3%. MTS has a beta of 1.61 and a marginaltaxrate of 24%. The WACC is thus 11.71%.

Similarly, Vimpellimited with the ticker symbol ‘VIP ‘is a multinational telecommunication company. It has an equityratio of 47.8%, a debtratio of 52.2%; thecost of debt is 11%, andthecost of equity is 18.7%. Thecompany has a beta of 1.98, and a marginaltaxrate 0f 24%. The WACC is thus 14.65%.

Question 2

Themostdifficultpart in thecalculation of WACC is thecalculation of equity. Calculatingthecost of equity is tricky; unlike thecost of debt that is in theform of predeterminedinterestrates, equitydoes not have a concreteprice since sharecapitallacks an explicitcost. Arriving at thecost of equitymainly depend on thecompany’s perspectiveandwhatthe investors require as a returnfor their investment. Thecost of equityis thuscalculated as:

Re = rf + (rm – rf) *

Question 3

From thelist, Microsoft has a beta estimate (longtermaverage) of 0.95. This notwhat is expected since high technology companiesusuallyhave a highriskandhave betas of more than 1.

Verizon Communications, on theotherhand, has a beta (longtermaverage) of 0.50.This isexpected since communicationindustry is not posed with manyrisksbecausethese are utilitiesthatconsumers cannot do without.

Question 4

The beta of a company’s stocksignifiesthestock’s volatility; thedegree to which its pricefluctuatesin relation tothe overall market. Therevenuesgrowth of Sprint has beensmallcompared to thepeermedian of thelast two years. However, thereturn on assets has beencontradictory with the ROA forthelast two years which has trailed above thepeermedian. The ROA suggestthatthecompany might be operationally challenged in futurerelative to its peers. Thenegative beta meansthattheinvestment in Sprint moves in an oppositedirection to thestockmarket. Thenegative beta does not howevermeantheabsence of riskbutsuggeststhattheinvestment is offering a hedge against severemarket downturns. Ifthemarketreturncontinues to rise, thenegative beta investmentriskslosingmoney through opportunityrisks. Sprint’s performancecontradicts its negative beta since itsrevenues are growing, andthereturn on assets ishigher than thepeercompanies

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