# Question: in case 20 fort greenwold you solved for net present...

###### Question details

In Case 20, Fort Greenwold, you solved for Net Present Value
using a required rate of return given in the case. In the real
world, the required rate of return for a project (also known as the
discount rate or cost of capital) must usually be estimated by the
firm.

This week, you will employ the formula for the Weighted
Average Cost of Capital (WACC) to estimate the discount rate or
required rate of return for a food wholesale company needed to do
its capital budgeting.

The process of calculating WACC can be quite time-consuming
and error-prone, particularly if like most companies, there are a
variety of sources of financing capital in the firm's capital
structure (debt, equity, etc). Each of these sources of finance, or
securities, must be included in the WACC formula, typically in a
separate algebraic term that includes both the percentage of the
capital source (out of 100% across all sources) and its unique
cost. The only time securities can be combined within a single term
in the WACC formula, is when their costs (required returns) are
identical.

I have attached a Powerpoint presentation that will take you
through the entire process of estimating a company's weighted
average cost of capital by considering the firm's various financing
securities, the proportion each contributes to the total capital
structure, and the individual costs of each security. None of this
material should be new for you; however, you may not have had to
scan multiple data exhibits, identify and extract the appropriate
information in such a rigorous manner before.

Here are a few tips for estimating Taylor Brands' WACC:

1) When calculating the percentages or weights of the various
securities, use book values provided in the EXHIBITS.

2) When calculating the total amount of debt, remember to
include only longer-term securities, e.g., those that finance
capital projects. Do NOT include short-term liabilities like
Accounts Payable as these are not considered part of a company's
capital structure.

3) Notes Payable must be calculated separately from long-term
bonds as they usually have a different cost.

4) The cost (required return) of the company's retained
earnings can generally be considered to be the same as that of the
company's common stock.

5) The "risk premium approach" to estimating the company's
cost of equity is the Capital Asset Pricing Model (CAPM) given in
the slides.

6) Estimate the growth rate ('g') of dividends using the data
in EXHIBIT 3.

7) Don't forget to consider and include in the formula for
WACC, the company's tax rate which acts to reduce the after-tax
cost of debt.

Please answer Questions 2(a), 2(b), 3, 5(a), 5(b).