I am trying to calculate the discounted rate using WACC for VZ.
I just wanted to know if I am doing it right, and if the number seems reasonable. Here it goes:
Cost of Debt + Cost of Equity
= .614 ( .07 * (1-.30)) + .386 (.025 + .41(.07)) = 5% (which I will round up to 6% for safety)
.614 and .386 is the capital structure I got from morningstar.
30% tax rate assumed.
.07 (7%) is the estimated coupon % for VZ's bonds.
.025 (2.50%) is the 10 yr treasury rate assumed.
.41 is VZ's beta I got from Google Finance.
.07 (7%) is the risk premium (long-term returns, which I calculated by looking at 5-yr historical CAGR for VZ's stock price).
Does this seem reasonable? Thanks for all your help.
Btw. what are some reasonable WACC numbers for large-cap companies?
Sounds fine. Remember to use market yield on current debt rather than coupon rate for cost of debt. Anywhere from 5-10% for a financially solid company.
Thanks for the hlep Asatar. Is market yield on current debt same as yield maturity to debt? What number should I use on this page? http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=vz
And this is why I hate WACC cuz garbage goes in and garbage goes out.
Your calculations are correct and you're doing it the right way so don't worry about that but the actual numbers used are questionable. Again, you're taking the right numbers from the right sources, but does the output of 5% sound reasonable to you (it seems like you felt it was too low, probably correctly)?
I think something that you should consider would be backing in the pension somehow since from what I understand it's pretty massive. That would be the only real suggestion I could make.
Also, I am curious if my logic is correct: Because the interest rates are rising, shouldn't the pension related expenses go down?
Yeah 5% seemed kind of low. I knew VZ is a strong company, but I wanted to give myself a margin of safety and used 6% instead (would 7 or 8% be more fit?)
How do I "back in the pension?" Sorry for stupid questions, but this is my first internship...I understand that the pension got massive back in '07~08 and then again in the past year with a Sandy and other stuff (I think that's what 10K mentioned as the cause of the massive non-operating costs). I certainly took off some of that stuff from the SG&A calculations, but how do I take that into account in WACC?
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