BAFN200 Principles of Finance- weighted average cost of capital

Task:

1. To evaluate ethical issues in finance both domestically and globally and examine how financial decisions can impact socially responsible outcomes.

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. 

Assessment Overview: 

This assessment task consists of an analysis and visualisation of the data of real-life companies. The assessment investigates whether socially responsible companies have a lower weighted average cost of capital. The primary focus is to apply quantitative and finance methods to evaluate the cost of capital and highlight the effects of ESG practices on the cost of capital. This assessment will help students develop knowledge and skills for managing finance of Australian companies.  

Context  

Businesses are expected to be socially responsible for their social legitimacy and stakeholder orientation. A big challenge for companies to be socially responsible is to balance the expectations of different stakeholder groups. While the primary objective of a business is to maximise the value of the company, this needs to be achieved in a responsible manner. Aligning social responsibility with the long-term objectives of the shareholders can help motivate the companies to act in a socially responsible manner. For example, socially responsible companies have a lower cost of equity (e.g., Dhaliwal, Li, Tsang, and Yang, 2011). 

Requirements:  

On the backdrop of an association between cost of capital and social responsibility, address the following requirements:
(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)  

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