Part One
Return to the same MS Excel file you submitted for Memo 5. Under the Week 6 tab, gather the information needed to determine the WACC and leverage ratio information about my chosen company Teslaand its closest competitor General Motors. (Hint: Enter the requested information to figure out your WACC and leverage ratios. The MS Excel formulas are already done for you.)
Part Two
In a memo to the Chief Executive Officer, answer the following questions, which are pre-loaded in your Memo Template:
- The weighted average cost of capital (WACC) represents a firm’s average cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. WACC is a common way to determine the required rate of return because it expresses, in a single number, the return that both bondholders and shareholders demand to provide the company with capital. A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will demand greater returns. Considering this information, what is the WACC of your chosen company and its closest competitor? Does one company appear more volatile than the other? How does the WACC translate to both companies’ stock performance?
- Leverage ratios measure the amount of capital that comes from debt. In other words, leverage financial ratios are used to evaluate a company’s debt levels. The debt ratio measures the relative amount of a company’s assets that are provided from debt. Considering this information and drawing from the information in your course material, find three debt/leverage ratios for your chosen company and its closest competitor. How does your chosen company compare to its closest competitor, as far as these ratios? What inference can you draw from the historical ratios and where they are now?
- Which of the two companies is the “better run company”? (Keep in mind that you will get posed this question for the next several weeks. Track of how you grow from this week to the next week with your response.)
