Cost of debt, equity and capital structure
1. Provide a clear, concise description of your firm, its competitive position (e.g. within the industry) and long-term prospects of the firm and the industry.
Our company is Expedia
2. Using the past N years of data to estimate your own beta and alpha on the company based on a regression analysis. Document data sources used.
1. Decide on how long a time period (from which year to which year) that you will use to perform your estimation, and explain why?
2. Provide your beta and alpha estimates, as well as the statistical significance (e.g. t ratio, p-value). Comment briefly.
3. Plot the security market line for this company. Clearly show alpha and beta on the diagram. Is the company corrected priced, overpriced or underpriced?
4. Some of Cougs Financial Group’s clients are large conglomerates that are looking for target firms to acquire. Based on your estimation and analysis, do you recommend acquiring this company you are analyzing? Why or why not.
3. Find the cost of equity, the cost of debt, and the WACC of the firm. Show your computational steps clearly and document data sources used and any assumptions you make.
1. In estimating cost of equity, use both DGM and CAPM approaches. Do you get the same number?
2. Which estimate (from DGM or CAPM) do you trust most and will use in your WACC computation? Why? Explain briefly. What is the WACC?
4. Describe the firm’s current capital structure (D/E).
1. Can you justify the firm’s current capital structure using one of the capital structure theories we have learned?
2. If the firm is not at an optimal (or proper) capital structure right now, comment on the negative consequence of keeping its current capital structure, and what the firm should do to move toward a more proper capital structure.