Description
3 discussion responses with references
Initial information: Next, select a company in a specific industry. In your initial post, address the following:
What company have you selected and in which industry? Put your company and industry in the subject line.
Note: Be sure to select a company that is different from those selected by your peers. In addition, you may not use your selected company, as it is part of your final project.
What is the weighted average cost of capital (WACC) for the company? Provide the source where you have obtained it or the performed calculation.
What are some of the risks that the company and industry are facing in the current economic and political environment that could impact their WACC? Research risks using current financial publications (e.g., Bloomberg, The Financial Times, The Economist).
Note: For this assignment, a current publication is no older than one year. Cite your source.
In your responses to your peers, provide feedback, including different examples related to the risks and their impacts on the specific industry or company they selected. Comment on the similarities and differences in your peer’s responses compared to your own.
Response 1 needed: McDonald’s has a current WACC of 7.25 percent, with a return on capital employed of 24 percent. This means the company is far exceeding its minimum required return on the investments it spends internally. This is a good sign for investors and lenders, as it means that the company is able to take the investments or loans and generate a better return that the market interest rate at the time of investment.
One risk that McDonald’s faces is the risk of oversaturating the market, especially domestically. As the already established industry leader in the fast food market, the company does not have significant room to expand in the current domestic market, and at some point will run into diminishing returns on investments. Another risk is inflation and the impact of consumers cutting discretionary spending. If consumers choose to cook at home more often, it will dimmish the demand for their product, and as a result impact the industry as a whole.
Response 2 needed: The company I have selected is Nestlé Industry Food. Nestlé USA opened a new frozen foods manufacturing facility in Jonesboro, Arkansas, USA, in the second quarter of 2003. The site in Arkansas was chosen in August 2001 because of its central location in the USA, very competitive operating costs and state incentives. The plant produces a range of frozen meals in the ‘Lean Cuisine’ and ‘Stouffer’ brands. The new plant has required an investment from Nestlé of $165m. The floor space of the new plant totals 325,000ft² and it employs 400 personnel.
WACC is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term debt (Boudreaux, Rao, & Das, 2014). In other words, WACC is the average rate a company expects to pay to finance its assets. Companies often run their business using the capital they raise through various sources. They include raising money through listing their shares on the stock exchange (equity), or by issuing interest-paying bonds or taking commercial loans (debt) (Backus, et al, 1980). All such capital comes at a cost, and the cost associated with each type varies for each source. The following is the capital information relating to Nestle Inc.
SHARESVALUE Share Price $2,758.82
Shares Outstanding $504,323,736.00
Market Cap Equity $1,391,338.41
Cost of Equity (Re) 6.93%
Cost of Debt (Rd) 0.60%
Debt/Capital(D) 6.10%
Equity/Capital (E) 93.9%
V = (Debts +Equity) 100%
Total amount of debt $90,671.00
WACC 6.54%
Cost of
Equity Risk Premium 8.04%
Unreviewed Beta 0.78
Risk Free 0.66%
CoE 6.93%
D V ×Rd×(1−Tc)
WACC=(E V ×ℜ) +¿
Where E= Market Value of Equity
D = Market Value of Debt
Re = Cost of Equity
Rd = Cost of Debt
Tc = Corporate Tax Rate
From the available sources, the WACC for Nestle Inc can be calculated as follows for the year ending 31st December 2020.
V=D+E=93.9%+0.61%=100%
WACC=93.9100×6.93%+0.61100×0.6× (1− 14.8 100)
WACC=6.54 %
(Nestle) has a strong risk profile and is one of the leading companies based on our proprietary risk assessment of the food sector in the consumer industry. Its operational and country risk scores fare better, given its diversified territorial presence, strong R&D capabilities, and well-known brands. However, low liquidity is a cause for concern, affecting the financial risk scores. The company’s primary exposure is to the food sector, followed by non-alcoholic beverages. More than half of Nestle’s revenue comes from food (66%), and the rest from non-alcoholic beverages. Low-profit margins and weak growth projections characterize the food and non-alcoholic beverage sectors, resulting in an average industry risk score of 3.
Response 3 needed: This week the company that I am selecting is Starbucks Corporation; which is in the restaurant industry and services sector. Before we see Starbucks’s weighted average cost of capital (WACC), we must discuss what WACC is defined as. “Weighted average cost of capital (WACC) represents a company’s average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. As such, WACC is the average rate that a company expects to pay to finance its business” (Hargrave. P1. 2023). Starbucks’s weighted average cost of capital (WACC), “is calculated as the weighted average of its cost of equity and cost of debt, adjusted for tax” (Alpha Spread. P2. 2024). The WACC was at 7.08% (Alpha Spread. P2. 2024). The calculation is listed as:
Cost of Equity (7.4%) x Equity Weight (89%) + Cost of Debt (4.57%) x Debt Weight (11%) = WACC (7.08%)
There are many different risks that can affect WACC in the restaurant industry; these could be corporate tax rates and the economic health conditions of the market. A major risk that can affect WACC can be interest rates. During COVID-19, for example, the restaurant industry was majorly affected due to quarantine. Individuals were not leaving their houses for a while; if they were to, it was for basic human supplies or grocery store runs. The WACC was majorly affected and that was due to the health and wealth of the country and interest rates that went with them as well. This shows us that if interest rates are increased, that increases tax rates and will overall increase the WACC and vice versa.
