Assume current (MV) financing proportions = future financing

Introductory Corporate Finance Lynda Livingston WACC PRIMER SUMMARY OF APPROACH Assume current (MV) financing proportions = future financing proportions (use all sources), and assume current projects’ risk = future projects’ risk WACC = wd*kd*(1-T) + we*ke + wPS *kPS ______________________ Wd = % of capital structure from debt = (MV of debt)/(MV of all securities) Mvdebt = (#bonds)*(price/bond) See B/S: BV bonds/$1000/bond = # of bonds Price = (coupon rate)*($1000)*(P/A, i=YTM, n= # of periods) + $1000*(P/F, i=YTM, n= # of periods) for bonds, need PRICES (for MV weights and YIELDS (for kd) if you have on, you can solve for the other NOTE: if sell at par, price = $1000 and coupon rate = YTM ______________________ kd = average yield on bonds = [MVbondA/total Mvbonds]*(YTMA) +[MVbondB/Total Mvbonds]*(YTMB)+ ______________________ We = % of capital structure from equity = (MV of equity)/(MV of all securities) ______________________ k e: (1) historical: realized dividend yield + realized capital gains yield D1985/P1984 + (P1985 – P1984)/(P1984) = historical return for 1984-85 MVequity = (# of shares) * (price/share) See B/S: BVstock/(par value/share) = # of shares NOTE: Ignore Additional Pain-in Capital, etc. (2) kd + ________ (3) CAPM: rf = β*(E(Rm) – rf), where rf = T-bond rate, E(Rm) = expected (better) or actual return to market (S&P500, etc.); can use realized premium of market over T-bonds for the whole (E(Rm) – rf) term ______________________ kPS = ($dividend)/(current price) ______________________ g: (D1987-D1983)/D1983 = total growth over 4 years (1 + total growth)1/4 – 1 = g = geometric average growth rate per year over 4 years (4) D1/P0 + g Use dividend growth or earnings growth; beware of payout ratio changes! INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 2 WEIGHTED AVERAGE COST OF CAPITAL WACC = wd*kd*(1-T) + we*ke WHY WACC? The firm’s weighted average cost of capital is a single number that summarizes the cost of new capital—that is, long-term financing. Firms need long-term financing in order to invest in profitable projects. However, you can’t identify profitable projects (ones that return more than they cost) until you know what they cost. The cost is WACC! Thus, we need WACC as an estimate of the hurdle rate for a firm’s investments—the minimum acceptable return from an investment. There are three basic assumptions we’ll use when finding WACC: fundamental assumption: All assets (new investments/projects) are financed with both debt and equity. specific assumptions for our method: (1) constant financing risk (the weights assumption): The current proportions of debt and equity that we use to finance new assets will be the same as the future proportions. (If this weren’t true, then our new debt and equity holders would charge different amounts for their new money [for example, if we decided to use more debt in the future, then both our costs of debt and equity would rise, since increased leverage makes everyone’s risk higher].) Keeping our debt/equity mix constant allows us to determine the current proportions just by looking at what we’re currently using (by restating the balance sheet in market value terms), and then use these proportions in our WACC. (2) constant business risk (the costs assumption): The risk of current projects is the same as the risk of our new projects. If this weren’t true, we’d have to adjust our current costs of debt and equity to reflect the different risks of the new projects. We make both of our specific assumptions to allow us to extrapolate from our current situation. Whatever we currently pay for debt and equity, and however much of it we use, that’s what we’ll do in the future. INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 3 FINDING THE INPUTS kd: The cost of debt is the weighted average of all the yields (YTMs) on all the outstanding bond issues. Once you have figured out the yields and the market values, find kd by: kd = (YTM on issue A)*(MV of issue A/total MV of all debt) + (YTM on issue B)*(MV of issue B/total MV of all debt) + … (there will be a term for each bond issue). Note that all the weights must sum to one, since the sum of the individual issues’ market values must sum to the total MV of all debt. When finding kd, for each bond issue you will need:   price per bond o the bond pricing model o current yield (annual coupon payment/price) YTM o the bond pricing model if you have price o comparable bonds’ YTMs (for example, if two issues from the same issuer have the same maturity date, rating, and seniority, then they will have the same YTM) number of bonds o number of bonds = (total par value of issue from B/S)/($1,000) total market value of issue o MV = (number of bonds)*(price per bond)   Wd: The weight of debt is just the proportion of the total market value of all our outstanding securities that comes from debt. It is therefore (market value of debt)/(market value of debt + market value of equity). We will already have the total market value of debt (TMVd), since we used this to find kd. INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 4 We: The weight in equity is just the proportion of the current capital structure made up of equity. It is therefore: we = (MV of equity)/(MV of debt + MV of equity). Note that (wd + we) = 1 (unless there’s something else in the capital structure, like preferred stock; in general, though, there will be a WACC term for each financing source, and the sum of all the sources’ weights will add to 1). To find the MV of equity, just multiply the number of share by the price/share: MV of equity = (price/share)*(number of shares). You can find the number of shares on the B/S by dividing the BV of equity (DO NOT include stuff like Additional Paid-In Capital and Retained Earnings!) by the par value/share: number of shares = (BV of stock)/(par value/share). To find price per share--- you may have to do a stock-pricing problem (this requires that we assume that the fundamental price is the same as the current market price). You may be given a table with helpful information; just be sure that you use the current (not historical, not average) price per share. ke: The cost of equity is the hardest part. You should find as many estimates as you can and then summarize your estimates using your best judgment about the stock. (This may involve: picking one of your estimates, averaging your estimates, averaging some of your estimates, throwing out all your estimates and choosing something else… Your goal is to choose a cost that you think is representative of investors’ current requirement for your stock’s return. Even though this final choice is subjective, you are informing your selection with all of the background work that you’ve done when finding the following four estimates. METHOD 1: add something to the cost of debt ke = kd + something The ―something‖ is your estimate of the default premium of equity over debt. THIS RELATIONSHIP BETWEEN DEBT AND EQUITY CANNOT BE VIOLATED! Pros: -easy -based on current information, not historical Cons: -pretty subjective INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 5 METHOD 2: use the realized return to equity over some past year or years: ke = realized annual return = D1/P0 + (P1-P0)/P0, where the 1 subscript refers to end-of-year values and the 0 to beginning values. You should determine the realized return for as many periods as you can. Perhaps you will begin to see a pattern. Perhaps you will be able to identify periods that are clearly anomalous or are not representative of your picture of the future. As always, the more data you have, the better your analysis will be. Pros: -easy Cons: -you must assume past investors realized what they expected -you must assume future investors require the same as past ones did -you have a lot of latitude in picking your period METHOD 3: CAPM ke = rf + *[E(RM)-rf] rf : You will use the Treasury yield on a T-bond (long-tem benchmark) or a T-bill (closest possible thing to risk-free) for the risk-free rate. E(RM): You can use realize or expected returns to some broad index for the market return (like the Wilshire 5000 or the S&P500 index, for example). E(RM) – rf: There are also lots of data on realized risk premiums of stocks over bonds that you could use for the risk premium term. For example, if stocks typically returned 4 percentage points more than T-bonds, you could just set up the formula as: ke = (current T-bond yield) + *(4%) : Beta is a measure of a stock’s market risk. It magnifies the behavior of the market. For example, if  = 1, the stock acts just like the market: if the market is up 3% today, so is our stock. If a stock’s  is less than one, the stock’s movement is less than the market’s (this is called a ―defensive‖ stock); for example, if  = .5, the stock is up 1.5% if the market is up 3%. If  > 1, the stock moves more than the market (an ―aggressive‖ stock); for example, if  =.2, the stock is up 6% when the market’s up 3%. INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 6 CAPM, continued: We might use any of the following language to describe a stock with a  of 2:    the stock is twice as volatile as the market when the market is down 2%, this stock is down 4% this stock is twice as responsive as the average stock to the movements of the market pros: -beta values are readily available -estimates of expected returns to the market are available -easy cons: -how were those HISTORICAL betas compute? -what is the market, anyway? METHOD 4: the constant-growth model ke = [D1/P0] + g = [D0*(1+g)/P0] + g The whole idea is to find g. Remember that g represents a constant growth from now to infinity, so it shouldn’t be some gigantic thing that a firm realized over its first two years in the business. You can start with the realized growth in earnings or dividends to determine g. Look for language in the problem that might suggest that some periods from the past are more likely to be ―normal‖: we want to omit periods that clearly would not represent the future (just as we did when evaluating the historical estimates). As long as the payout ratio is constant, g for earnings per share and g for dividends per share will be the same. However, if the payout ratio is increasing, dividends will grow at a faster rate than earnings. Keep that in mind when determining your g. A stock is not in constant growth if its payout ratio hasn’t stabilized.1 working for g: The more growth rate estimates you have, the better. Start by finding the growth rate in earnings for each single period that you consider ―normal.‖ You do this by simply taking (new – old)/(old): (endof-period earnings – beginning-of-period earnings)/( beginning-of-period earnings). If these stabilize, you can use the stable rate as an estimate of g. 1 In the real world, we use constant growth as an approximation to the stock’s behavior. Random things will happen even to a stable company that will cause fluctuations in earnings. We wouldn’t want to apply this method to a stock that was clearly growing erratically, however. INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 7 CONSTANT GROWTH MODEL, continued You can repeat this process for dividends. However, if the payout ratio is constant, then your results for dividends will equal those for earnings. If the payout ratio isn’t stable, then you’re not in constant growth anyway! You can also use a multi-year period to find an estimate of g. This will give you an ―average‖ (smoothed) growth rate. Do this by picking a period, finding total return over that period, and then annualize that return. For example, period periodic return = = = = 1989-1993 (that’s 4 periods, not 5!) (new-old)/old (1993 dividend –1989 dividend)/(1989 dividend) (1 + periodic return)¼ -1. annual return pros: -uses current information cons: -HARD! -depends greatly on analyst’s perception of relevant information INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 8 EXAMPLE PROBLEMS WITH ANSWERS BPA315/Spring, 2001/WACC HOMEWORK Brick’s Bricks, a manufacturer of, um......BRICKS, has the following balance sheet as of December 31, 2000 (note that all numbers are in millions): Assets Bricks $20 Bracs $40 Total Current Assets $60 Brick-Making Stuff Total Fixed Assets Total Assets $100 $100 $160 Liabilities 7% senior notes, due 2005 4% subordinated debentures, due 2005 10% mortgage bonds, due 2005 11% convertible bonds, due 2013 Total Liabilities Equity Common Stock (par = $10) APIC Retained Earnings Total Equity Total L&OE $4 $2 $15 $5 $26 $25 $79 $30 $134 $160 Through your tireless efforts at fundamental analysis, you have also discovered the following: BONDS  The bonds due in 2005 all have exactly 5 years until maturity; the 2013 issue has exactly 13 years.  The subordinated debentures pay interest semiannually; all the other issues pay interest annually.  The convertible bonds are priced at $776.6741.  The mortgage bonds and the senior notes are both rated AAA and have the same priority in bankruptcy.  The yields-to-maturity for the senior notes and the subordinated debentures are 5% and 7%, but you weren’t told which yield goes with which issue. STOCK  Shares of BB’s first sold at $41.60/share in the primary market. This IPO was in 1990.  BB’s stock is defensive, which means it is relatively unresponsive to the business cycle and general market movements. It is positively correlated with the market, however, and generally gains or loses half as many percentage points as does the market over any given period.  Some past data on BB’s is given in the chart below: (values as of December 31 of the given year) 1993 1994 1995 1996 1997 1998 1999 2000 $47.00 $49.25 $54.00 $57.50 $55.75 $71.00 $74.75 $77.00 $3.00 $3.00 $3.50 $4.00 $4.00 $4.50 $5.00 $5.00 $6.00 $6.25 $7.45 $8.15 $7.90 $9.02 $9.53 $10.00 stock price dividend earnings/share INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 9 MARKET  The current yield on 3-month T-bills is 2%.  The current yield on 30-year T-bonds is 10%.  The historical premium of the S&P500 over T-bills is 8%.  The Dow Jones Industrial Average has gained 22% for each of the past 5 years.  Inflation has remained a steady 2.3% per year for the past 3 years.  The Producer Price Index was up .6% last month.  The marginal tax rate for brick producers is 28%.  The average tax rate for brick producers is 25%. Estimate Brick’s Bricks’ WACC. State all your assumptions. Be clear and NEAT! INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 10 BPA315/Spring, 2001/WACC HOMEWORK ANSWERS Estimate Brick’s Bricks’ WACC. State all your assumptions. Be clear and NEAT! DEBT For each of the bond issues, we need to know the YTM, the price, and the number of bonds. This will allow us to solve for the market value of each of the issues, which will in turn allow us to find the cost of debt (kd). First, we’ll consider the convertible bonds. We were told that these have 13 years until maturity, have a coupon rate of 11%, have a book value of $5,000,000, pay interest annually, and are priced at $776.6741. We were not given the YTM, so we’ll need to solve for it using the pricing equation: $776.6741 = $110*(P/A, i=YTM, n=13) + $1000/(1+YTM)13 We can solve this by trial and error: we’ll guess an interest rate, substitute it into the right-hand side of the equation, and see if we get the correct price. We know one thing which can help us: because the bond is selling at a discount, the YTM must be greater than the coupon rate of 11%. If we try a YTM of 12%, we find a price of $935.7645. This price is too high, so the YTM we tried was too low. Trying again with a rate of 18%, we find a price of $656.3341; this price is too low, so 18% is too high. We keep trying rates between 12% and 18% until we hit on the right one, 15%. Now, let’s determine the YTMs for the other issues. All three of the other issues have five-year maturities, so we might suspect that they have the same yield. The mortgage bonds and the senior notes have the same rating and priority, so they are truly substitutes and would indeed have the same YTM. However, the third five-year issue is subordinated, which means that it will pay its holders after the more senior notes have been fully paid. Subordination means greater risk, and therefore greater yield. These debentures will have a higher YTM than the other five-year issues. We can conclude then that the subordinated debentures will yield 7%, while the other two five-year issues will yield 7%. Now that we know all the YTMs, we need to find all the prices. The subordinated debentures pay interest semiannually, so we can solve for their price as: price4% = = = ($40/2)*(P/A, i=7%/2, n=5*2) + $1,000/(1.035)10 $20*[1 - 1/(1.035)10]/(.035) + $1,000/1.4106 $20*(8.3166) + $708.9182 = $875.25 These bonds are selling at a discount, since their YTM is greater than their coupon rate. The other two issues pay interest annually. We can therefore find their prices as: price7% price10% = = = = $70*(P/A, i=5%, n=5) + $1,000/(1.05)5 $70*(4.3295) + $1,000/(1.2763) $100*(P/A, i=5%, n=5) + $1,000/(1.05)5 $100*(4.3295) + $1,000/(1.2763) = $1,086.59 = $1,216.46 INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 11 BRICK’S BRICKS, continued Both of these issues sell at premiums, since both have coupon rates greater than their YTM of 5%. The bond with the higher coupon rate sells for a higher price; the larger initial payment is compensated exactly by the higher annual interest cash flows, leaving these two bonds perfect substitutes. Now that we have the prices of each issue, we can solve for thier market values. Thus: MV7% = = = = = = (price7%)*(number of 7% bonds) (price7%)*(BV7%/$1,000 par) ($1,086.59)*($4,000,000/$1,000) ($875.25)*($2,000,000/$1,000) ($1,216.46)*($15,000,000/$1,000) ($776.6741)*($5,000,000/$1,000) = = = = $4,346,360 $1,750,500 $18,246,900 $3,883,370.50 MV4% MV10% MV11% The total market value of debt is $4,346,360 + $1,750,500 + $18,246,900 + $3,883,370.50 = $28,227,130.50. We can now solve for the cost of debt as follows: kd = = w7%*(YTM7%) + w4%*(YTM4%) + w10%*(YTM10%) + w11%*(YTM11%) [(MV7%)/(MVall debt)]*(YTM7%) + [(MV4%)/(MVall debt)]*(YTM4%) + [(MV10%)/(MVall debt)]*(YTM10%) + [(MV11%)/(MVall debt)]*(YTM11%) ($4,346,360/$28,227,130.50)*(5%) + ($1,750,500/$28,227,130.50)*(7%) + ($18,246,900/$28,227,130.50)*(5%) + ($3,883,370.50/$28,227,130.50)*(15%) (.154)*(5%) + (.062)*(7%) + (.6464)*(5%) + (.1376)*(15%) = = = 6.5% Now let’s consider the equity. We can easily solve for the market value of equity: MVe = = = = (price per share)*(# of shares) (price per share)*(BV of common stock/par value per share) ($77.00)*($25,000,000/$10) $192,500,000 We can now solve for the weights for the WACC expression: wd = = = (MVdebt)/(MVall securities) (MVdebt)/(MVdebt and equity) ($28,227,130.50)/($28,227,130.50 + $192,500,000) = .1279 INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 12 BRICK’S BRICKS, continued we = 1 - wd = .8721 The final input for the WACC equation is the cost of equity. Here we will need to use our four methods. (1) add something to the cost of debt We know that the cost of equity must be greater than the cost of debt, so it must be more than 6.5%. (2) historical Here, we need to determine the realized returns to equity from the past. For each year of operation (or for the period we as analysts think is relevant-- that is, best represents what we should expect for the future), we will determine the capital gains yield and the dividend yield. We hope that a pattern will emerge which we will feel confident extrapolating. Using the values given in the table, we will solve the following equation for each year: realized return to equity = = dividend yield + capital gains yield (end-of-period dividend)/(beginning price) + (ending price - beginning price)/(beginning price) For 1990-91, for example, we would use [($3/$47) + ($49.25 - $47)/($47)] = (.0638 + .0479) = 11.17%. Values for the other years are calculated similarly. The results have been added to the table. (values as of December 31 of the given year) 1990 1991 1992 1993 1994 1995 1996 1997 stock price $47.00 $49.25 $54.00 $57.50 $55.75 $71.00 $74.75 $77.00 dividend $3.00 $3.00 $3.50 $4.00 $4.00 $4.50 $5.00 $5.00 earnings/share $6.00 $6.25 $7.45 $8.15 $7.90 $9.02 $9.53 $10.00 realized return (%) 11.17 16.75 13.89 3.91 35.43 12.32 9.70 We should ignore the 3.91% from 1993-94, since there was a negative capital gains yield this period, and we would never assume that an investor would EXPECT that. We might also ignore that 35.43% return for the following year, since it appears abnormally large. For the years we have left, we might assume that all are equally likely (and so find their average, which is [11.17% + 16.75% + 13.89% + 12.32% + 9.70%]/5 = 12.77%), or we might believe that the last year’s 9.70% represents the current requirements of investors, so we’d use that. Your choice will depend upon your in-depth knowledge of this firm, its industry, and the market as a whole. Using my in-depth knowledge, I will choose 12.77% as my estimate. INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 13 BRICK’S BRICKS, continued (3) CAPM For this method, we need to solve: ke = rf + *[E(RM) - rf] For the risk-free rate, we could consider either the T-bill yield or the T-bond yield. (Remember that T-bill proponents argue for it since it is the least risky security available, having not only no default risk but a minimum maturity premium; T-bond advocates think one should use a long-term benchmark to price a long-term asset like stock.) For the market return, we would like to have an expected return from as broad a group of assets as possible. What we actually have, however, is a historical return to the DJIA (who knows if we can project that into the future?) and a historical premium of the S&P500 over T-bills (again, historical). If you choose to use the DJIA rate of 22%, you would substitute 22% for E(RM), and then use your chosen Treasury rate for the risk-free rate. However, I will choose to use the S&P500 premium. I make this choice because not only is the S&P500 closer to the all-inclusive ―market‖ envisaged by the CAPM, but also because premiums tend to be more stable over time than are basic rates. The 22% return on the DJIA is highly dependent upon the current economic environment, which may change drastically in the future. However, the spread between the stock market and Treasuries has been fairly stable across different market environments. Now, note that once I choose the S&P spread, I MUST choose the T-bill rate as my risk-free, since the spread is based on that rate. Had the spread been based on bonds, I would have used them. The last necessary input is the firm’s beta value. Beta measures the comovement of the stock with the market. A stock with a beta of 2, for example, magnifies any market movement by a factor of two: if the market is down 2%, the stock would be down by 4%. We are told that BB’s movement over a given period is half that of the market, so its beta is .5. Now, we can find another estimate of the cost of equity as 2% + .5*(8%) = 6%. Since this is lower than the cost of debt, we will not use this estimate. (4) Constant growth model To use the constant growth method, we need to estimate the following: ke = D1/P0 + g We need to determine an estimate for the growth rate. We will look to the historical data first. The table below contains the growth rate for each period for all of the three series. We hope to find some stable growth relationship which would suggest a rate appropriate to project into the future. 1990 1991 4.79% 0% 4.17% 1992 1993 9.64% 6.48% 16.67% 19.20% 1994 1995 1996 1997 -3.04% 27.35% 5.28% 3.01% 14.29% 0% 12.50% 11.,11% 0% 9.40% -3.07% 14.185% 5.65% 4.93% P D E INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 14 BRICK’S BRICKS, continued In true constant growth, all three of these series should grow at the rate g. We are obviously not looking at a period of constant growth. It is our job to determine which series best represents the sustainable growth rate of the company, and then to choose the actual rate. Looking at the numbers above, it is apparent that the managers of BB smooth their divdidends: they do not pay out a constant proportion of earnings, but rather they try to have their divdiends grow by stable dollar amounts. The divdiend series therefore does not represent the true rate of growth of the company, but rather the adjusted rate determined by the management. The rpice serises and the earnings series appear to be highly correlated. We will, however, choose the earnings series, since it offers the more unadulterated reflection of the operation of the business. Now, to choose the rate. We will again throw out the unusually high and low numbers. We’re left with rates which cluster around 5%, which is a reasonable constant growth rate. I will therefore choose g=5%. Using this growth rate, we can estimate next period’s earnings to be $10.00*(1.05) = $10.50 and the dividend to be $5.00*(1.05) = $5.25. Our estimate of the cost of equity is then ($5.25/$77.00) + .05 = 11.82%. Now, we have looked at all four methods for computing the cost of equity. We now must choose a rate. We can do this in whatever we think is the best way-- again, we’re using our insight into the environment to choose the best summary number. I will choose 12%, which is between the historical estimate and the constant growth estimate. Our last input is the firm’s tax rate. We were given both an average rate and a marginal rate. ALWAYS USE THE MARGINAL RATE. We are getting money for NEW projects, and these will contribute NEW cash which will be taxed at the MARGINAL rate. The average rate reflects what we’ve already been doing, which is irrelevant here to our decision to choose future projects. Now, we can plug everything into the WACC formula to get our final answer: WACC = = wd*kd*(1-T) + we*ke (.1279)*(6.5%)*(1-.28) + (.8721)*(12%) = 11.06% INTRODUCTORY CORPORATE FINANCE/WACC PRIMER 15 Winter, 1999/WACC HOMEWORK The balance sheet for EuroZone is below. Assets Cash Accounts Receivable Inventory Total Current Assets Property, Plant, and Equipment Total Fixed Assets $10,000 $15,750 $12,250 $38,000 $25,000 $25,000 Debt 5% notes, due 2001 10% bonds, due 2008 20% bonds, due 2008 Total Debt $20,000 $15,000 $10,000 $45,000 Equity Common Stock (par value $2) $2,000 Additional Paid-in Capital $14,000 Retained Earnings $2,000 Total Equity $18,000 Total Debt & Equity $63,000 Total Assets $63,000 EuroZone’s average tax rate is 25% and its marginal tax rate is 30%. The 5% notes are currently selling at par. They will mature in exactly 2 years. The 10% bonds have exactly 9 years until maturity and are currently priced at $1,272.0677. The 20% bonds also have exactly 9 years to maturity, but they are subordinated to the 10% bonds, and so have an additional risk premium of 2 percentage points. All bonds pay interest annually. The earnings and dividend history for the firm is below. EuroZone Company plans to maintain the 50% payout ratio for the foreseeable future. The firm’s current stock price is $110. year earnings per share dividends per share payout ratio average price per share 1992 1993 1994 1995 1996 1997 1998 $2 $3 $3.50 $4.20 $5.04 $6.05 $7.26 $0.65 $0.45 $1.00 $2 $2.52 $3.02 $3.62 32.5% 15% 28.6% 47.6% 50% 50% 50% $44.01 $47.32 $54.25 $60.50 $62.43 $74.92 $89.90 Analysts are projecting a 13% return on the Wilshire 5000, a broad-based stock market index. This index has averaged a 14% return over the past 5 years. T-bills are currently yielding 4%, while Tbonds are yielding 7%. Value Line estimates that EuroZone’s beta is 3.0. Determine the WACC for EuroZone. Note: some check figures (may be subject to rounding discrepancies): MV of the 10% bonds = $19,081.0155 realized return to equity for 1992-93 = 24.83% cost of debt = 6.265% weight of equity = 66%