Following the example in class, compute the weighted average cost of capital for your assigned companies, either office supply firms or department stores. (Your group
will be assigned to analyze one or the other.) Then write a brief memo to the CFO for whom you work. (Your group is assumed to work for either John J. Mahoney of
Staples or Wesley S. McDonald of Kohl’s, as assigned.)
All team members should participate in completing this assignment. Submit one write-up per group, both electronically and as hardcopy.
• All data were collected on 1 November 2011.
o Loans and bonds are both loans to corporations. In calculating WACC, treat a loan just as you would a bond.
o Not all details on outstanding loan amounts are available. Assume the amount outstanding is the maximum amount shown. All loans are floating-rate loans tied
to LIBOR, the London Inter-Bank Offered Rate. LIBOR + 50 means the interest rate on the loan equals LIBOR plus 0.50%. (0.50% = 50 basis points; 1.00% = 100 basis
o For loans tied to LIBOR, the market value of a loan is equivalent to the loan’s book value.
o The figure reported in the “yield” column is the yield to maturity on the bond.
o Bond prices are reported as a percent of the bond’s $1,000 face value and without the percent sign. A bond price of 98.25 means $982.50; a price of 102.05
• Additional market data on 1 November 2011
o Marginal tax rates:
? SPLS, OMX, DDS, KSS: 40%
? ODP: 0%
o Market risk premium, [ E(RM) – RF] :7.5%
o Historical spread between 20-year US Treasury bonds and 1-year US Treasury bills: 2.3%
o Interest rates:
? LIBOR (3-month): 0.50%
? 20-year US Treasury bonds: 2.90%
o Stock prices: SPLS, $14.27; ODP, $2.16; OMX, $4.88; DDS, $51.20; KSS, $53.18
• Stock indexes representing the price of the market portfolio:
o S&P 500: SP 500
o Dow Jones Total Stock Market Index: DJTSMI
Compute betas for each stock using both indexes; also, compute two WACCs for each company using both betas.
• Present all your beta calculations in one worksheet; present all your WACC calculations in another. Please format each worksheet to print out on one page.
• Use proper memo heading (see the sample memo posted at the Moodle site)
• The first paragraph should be a one or two sentence introduction.
• In the second paragraph explain carefully the procedure you used to compute the WACCs. Note whether the choice of market portfolio (SP500 or DJTSMI) makes a
• In the third paragraph explain the purposes to which your WACC estimates may or may not be put. Use examples relevant to your companies.
• In the fourth paragraph compare and contrast the WACC estimates for your companies. Discuss what factors might account for their similarities and differences.
Mention whether your company’s WACC is better or worse than the others.
• Attach the worksheets showing your WACC and beta calculatio
Dillard’s Inc (DDS)
Description: DILLARD’S INC
Immediate Parent: –
Ultimate Parent: –
Name # Amount Issued Amount Outstanding
Loans 1 1,200,000,000 –
Bonds 7 850,000,000 649,627,000
Total 8 2,050,000,000 –
Issue Date Purpose Amount Facilities
2007/05/03 Dillard’s Inc General Purpose 1,200,000,000 USD 1
Facility Type Maturity Date Facility Amount (USD) Country Currency Issue Date Base Rate/Spd
Revolver/Line >= 1 Yr. 12-Dec-2012 1,200,000,000 United States USD 03-May-2007 LIBOR+125
Total 1,200,000,000 USD 1
Currency Issues Outstanding Issued
U.S. Dollar 7 649,627,000 850,000,000
Description Maturity Date Amount Outstanding (USD) Cpn Class Country Issue Date Debt Type Yield
Yld Date Price
DDS 8 12/10/01 01-Oct-2012 55,370,000 Fixed Coupon United States 13-Oct-1992 Debenture 9.003
DDS 7 18/01/15 15-Jan-2018 92,873,000 Fixed Coupon United States 12-Jan-1998 Sr Note 7.809
DDS 7 18/08/01 01-Aug-2018 160,959,000 Fixed Coupon United States 07-Aug-1998 Sr Deb 7.656
DDS 8 23/01/01 01-Jan-2023 44,800,000 Fixed Coupon United States 13-Jan-1993 Sr Deb 8.254
DDS 8 26/07/15 15-Jul-2026 96,000,000 Fixed Coupon United States 17-Jul-1996 Debenture 8.564
DDS 8 27/05/15 15-May-2027 53,800,000 Fixed Coupon United States 15-May-1997 Sr Note 8.542
DDS 7 28/12/01 01-Dec-2028 145,825,000 Fixed Coupon United States 07-Dec-1998 Sr Note 8.060
Total 7 649,627,000 850,000,000
Shares Outstanding 47,457,000