Math Problem: Calculation Weighted Avarage Cost Of Capital (Math Problem Sample)

Student’s Name
Professor’s Name
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WACC Calculation
To solve the question of WACC for Oshkosh Corporation I am taking monthly data for 24 months for the company from January 2014 to December 2015.
To determine the cost of equity, I will adopt the CAPM model where the cost of equity is given by;
Ke= risk free rate + beta*risk premium
For Oshkosh the risk free rate is equivalent to the returns on a 10 year treasury stocks on 31 December 2015, which was 2.27%
Using regression analysis from the 48-montsh provided on the returns of Oshkosh Corporation and S&P the beta value for the company is 1.4348
While the market risk premium for the company is 4.5%. Arguably this estimated was from the past data for risky evaluation in the U.S.
Substituting these values into the equation;
Ke = 2.27% +1.4348(4.5%)
Ke = 8.726%
* Based on the default spread table provided in the class notes, the average default spread on BB+
rated corporate bonds are 2.6% with “stable” outlook from Standard & Poor’s Rating Services. Combining this with the risk -free rate from (a) gives a cost of Debt equal to 4.87% that is (2.27% + 2.6%).
* In the Notes to the Consolidated Financial Statements, Oshkosh Corporation estimates the market value of long - term debt. We had $939 million of debt outstanding as of September 30, 2015, which consisted primarily of a $375 million term loan under our credit agreement maturing in March 2019, $64 million outstanding under a revolving credit facility and $500 million of senior notes, $250 million of which mature in March 2022 and $250 million of which mature in March 2025.
* Oshkosh Corporati...