Essay about Finance

1053 Words Jul 19th, 2016 5 Pages
Financial Analysis: Kohl’s

May 6, 2016
WACC Calculation:
a) Estimation of Cost of Debt:
For the purpose of calculation of cost of debt for the company, we have used the most recent debt issued by the company. Referring to note 2 of the financial statements, we found that during July, 2015, the company issued $650 million of 4.25% notes due in July 2025 and $450 million of 5.55% notes due in July 2045. (Kohl's, 2015) Accordingly, we used the average coupon rate of these two recently issued bonds to represent the cost of debt in the WACC formula. OK – I’ll go with that.
Average Coupon Rate:
= (4.25+5.55)/2
= 4.90%
Effective Tax Rate= Income Tax Expense/ Earnings before Tax
= 384/1057
= 36.32%
After Tax Cost of Debt=
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the expected rate of return by the equity holders of the company. c) Estimation of Market Value of Debt For the purpose of estimating market value of company’s debt, we used the long-term debt portion from the balance sheet for the latest year. This figure amounted to $2793 million. (Kohl's, 2015) As stated in the video, you also have to add the current portion of long-term debt. That makes this number somewhat higher. d) Estimation of Market Value of Equity: For the purpose of calculating the market value of equity, we used the following expression: = Current share price* Shares outstanding = 41.65* 185.17 (Key Statistics: Kohls , n.d.) = $7712.33 million OK - $7.7B e) WACC Calculation WACC: Weight of debt* After tax cost of debt+ Weight of equity* Cost of equity = 2793/ (2793+ 7712.33)* 0.0312+ 7712.33/ (2793+ 7712.33)* 0.0841 = 0.265*0.0312+ 0.735* 0.0841 = 0.008+ 0.0618 = 6.98% Consistent with your figures. This will be a little lower after you make the changes I cited. WACC rate calculated above will serve as the discount rate or the hurdle rate for the company. In other words,all the project of the company will be discounted using this rate only and only if the project returns are higher than the WACC rate, the project will be accepted. It is considerable that if any of the project has a higher or lower risk level, the WACC rate will be adjusted accordingly – unclear what you mean in this last sentence. Stock

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