Financial Management Case

Cost of bonds (Rd)

(1-.26)(2.503%) = 1.85% cost of bonds/ debt

Does the company have any preferred stock? If so, calculate Rps

Intel does not have any preferred stock.

Estimate the cost of common stock Rs using CAPM (aka, the required

return)

http://finance.yahoo.com/bonds

dividend and yield=4.20%(on yahoo finance summary for intel page)

CAPM

Rs=Rf+Beta(E(RM)-Rf)

10 year Treasury bond rate Rf= 1.81%

Beta =0.98

10 year (2003-2013) arithmetic average of S&P500 = 5.69%

MRP= 6.675 – 1.81 =4.86%

Calculate beta using monthly returns for the past 24 months and the

market model. Tell me a little bit about R2, R2 for this company,

and what it means.

Beta= 0.91

Rs = 1.81+ 0.91(4.86) = 6.23%

R squared = 0.293879903 (SPY as Benchmark)

2.3 WACC estimation

Compute WACC

WACC = wd rd (1-T) + wps rps + ws rs

= (13.3B/64.6B*1.85) + 0 + 51.2B/64.6B* 6.23%

= 5.3%

Investors use WACC to help decide whether a company represents a good investment opportunity. To some extent, WACC represents the rate at which a company produces value for investors—if a company produces a return of 20% and has a WACC of 11%, then the company creates 9% additional value for investors. If the return is lower than the WACC, the business is unlikely to secure investment.

Also compute WACC using the arithmetic average of Rs from my website.

Rs for Technology sector is 16.27%

WACC = 13.3B/64.6B*1.85 * (1-26%) + 0 + 51.2B/64.6B* 16.27%

= 13.28%

Tell me which WACC makes more sense to you, using required Rs or the arithmetic

average Rs, and why. Bear in mind that the number chosen should be commensurate

with risk.

WACC of 5.3% makes more sense because the WACC of 13.28 is influenced InfoTech, the dot-com run up prior to 2000 appears to be the reason for the high cross-sectional average Rs of 16.27%.

3.1 Financial statement analysis

Compute liquidity, asset management, debt management, profitability, market value,

and DuPont measures...