2. To estimate cost of debt and cost of equity of a firm applying the bond valuation and share valuation topics
3. To estimate the cost of capital and analyse the trade-offs between debt and equity in the capital structure.
(i) Select two companies from the list of companies in Table 1, these two companies must Have shares listed in a stock exchange market
Have at least one outstanding bond Have been paying dividend for at least 5 years
Be in the two different industries
(ii) Discuss the Environmental, social and governance (ESG) performance of the selected companies over two years (i.e., period from 2019 to 2020; or from 2018 to 2019).
(iii) Estimate the costs of debt for these companies in each year (2019 and 2020, or 2018 and 2019). You can assume that the costs of debt can be estimated as the yield to maturity on one outstanding bond of each company.
(iv) Using the dividend discount model, estimate the returns that investors currently require for holding this company’s stock in each year (2019 and 2020, or 2018 and 2019). You can assume that the firm’s dividends will continue to growth indefinitely at the same rate as the average dividend growth rate in the previous five years, or your can make an alternative assumption on the future dividend payments, as you see fit.
(v) Calculate the company’s weighted average cost of capital (WACC) over two years (same period as in part ii). You can use the book value weights for weights of debt and weights of equity. (i.e., book value of total debt over total capital, and book value of total equity over total capital).
(vi) Discuss if there is any association between ESG performance and WACC in these two companies over the selected two-year period (as in parts ii and v)