Capstone Baldwin Wacc Calculation

Paper #4 | | To: | Course Instructor |

| | From: | |

UniversityFinance Theory and Applications | | Email: | |

| | Date: | September 25, 2010 |

| | Re: | Paper # 4- WACC and valuation– Baldwin Company |

Introduction | The following report analyzes Baldwin’s credit rating considered by Capstone and based on Standard & Poor’s rating service. Also, it shows the method of calculations and assumptions that I used to estimate the WACC to value the entire company. In this process, I assumed a high grow rate for the first six years and then a constant growth rate. |

Credit Rating | I totally disagree about having “B” as a credit rate considered by Capstone. In my opinion, it should be rated as “BBB” because our company has adequate capacity to meet financial commitments and adverse economic conditions based on the following results: 1. Baldwin’s ROA has increased double since round 0, from 4% to 8%, and it has the potential to keep growing. 2. Baldwin’s Earning-to-interest ratio is 7.81. This value is within BBB to A type Bond according to S&P Corporate Bond rating criteria, 2006 (see table 1) 3. Using the technique hazard analysis1, our probability of default next year is 0.34%. It is close to what S&P has for BBB Bond type in its Annual Corporate Default study in 2005 (see table 2) 4. Our debt-equity ratio (including current debt) has decreased considerably since round 0, from 61% to 41%. It is within BB to BBB type bond (see table 1). The average of junk bonds has debt-ratio more than 80%. |

WACC | Baldwin’s Weighted Average Cost of Capital (WACC) for Round 2 is 12.82%. This means the company is paying $0.13 for every dollar it finances. Also, it is the appropriate discount rate to use for cash flows with risk that is similar to the overall firm. For the calculation of After-tax WACC, I used CAPM formula: Expected Return (r)= r+(rm-r).Assumption: * rE: Based on the sensor industry Beta coefficient of 1.3, and assuming...