Cost of Capital, Capital Structure,

and Capital Budgeting Analysis – McKesson Corporation

In this project, you are supposed to be a financial manager to apply the knowledge learn from Financial Management to estimate cost of debt, preferred stock and common equity, capital structure, and weighted average cost of capital (WACC) for a publicly traded corporation of your choice. You will use the estimated WACC as the discount rate to perform capital budgeting analysis for a hypothetical project (the data is given below) considered by the selected company McKesson Corp, and decide whether the project should be taken.

Estimate Capital Structure

– Estimate the firm’s weights of debt, preferred stock, and common stock using the firm’s balance sheet (book value) using the most recent year data.

– Estimate the firm’s weights of debt, preferred stock, and common stock using the market value of each component using the most recent year data.

Compute Weighted Average Cost of Capital (WACC)

– Estimate the firm’s before-tax and after-tax component cost of debt; (Note: If the information about the current corporate tax rate is not available, you can estimate the tax rate based on the firm’s historical tax payments).

– Estimate the firm’s component cost of preferred stock if the firm has issued preferred stocks.

– Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity for the firm.

– Calculate the firm’s weighted average cost of capital (WACC) using the market-based capital structure weights obtained from Step (3).

Capital Budgeting Analysis

– Using the WACC obtained from in Step (4) as the discount rate for this project, apply capital budgeting analysis techniques (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.

– Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. The Scenario analysis of several variables simultaneously is encouraged (but not required). A document Sensitivity Analysis using Data Table in Excel is provided for the introduction of the Data Table function in Excel.

– Discuss whether the project should be taken and summarize your report.

Do not directly copy any contents or results from any other sources. List the cited references in your project.