Caterpillar, Inc Case Study using WACC, Cost of Equity, Cost of Debt Calculation
Caterpillar, Inc Case Study using WACC, Cost of Equity, Cost of Debt Calculation
FIN 630 Modulе Sіx Short Pаper Guіdelines аnd Rubric
Overview: For this assignment, you will read the SSRN case study titled Caterpillar, Inc.: The Impact of Decision Biases and Risk on Capital Budgeting,
which analyzes the Caterpillar organization and the impact of emerging markets on capital investment decisions. This will be uploaded by me!
Caterpillar is expanding to foreign markets with the introduction of their new hybrid/electric exoloader. Using Caterpillar’s capital expenditure model (CapX),
you will evaluate two scenarios:
? Scenario A: Expanding and refocusing an existing production facility in Aurora, IL
? Scenario B: Building a new facility in China
In this short paper, you will closely examine the alternative models available to decision makers.
Prompt: In your paper, pay special attention to the following elements of the case study:
? Benefits of the expansion
? Operating costs
? Capital spending
? Risks to the overall company
The case study is based on data from financial statements from 2011. You will use current financial statements for your answers. Specifically, the following
critical elements must be addressed:
I. Download the current yearly financial statement (10-K) for Caterpillar (CAT). You can use SEC Edgar Company Filings. Note that the Caterpillar fiscal
year end is December 31. They have 120 days to file with the SEC, but generally they release new financial statements in February.
Direct Link to 2016 10-K Report: https://www.sec.gov/Archives/edgar/data/18230/000001823017000041/cat_10-kx12312016.htm
II. Using the financial statements, determine the discount rate and calculate WACC. In order to do that, you need to calculate:
A. Cost of debt
B. Cost of equity: Think CAPM (Capital Asset Pricing Model) or SLM (Security Market Line).
C. Can Caterpillar use preferred stock financing? (Analyze financial statements and answer yes or no; explain how you arrived at your
answer.)
Helpful hints for this step:
?
sperate sheet to upload the same information as well named:Calculations WACC, Cost of Equity, Cost of Debt Solution (Word Doc)
Use the ValuePro website to obtain an approximate estimation of WACC for Caterpillar (Ticker Symbol: CAT). Input “CAT” into the ValuePro
website to obtian the information.
? You can use Calculating Weighted Average Cost of Capital (WACC) or other YouTube videos as a guide on how to calculate WACC using financial
statements.
? An optional article in Module Five, Understanding Weighted Average Cost of Capital: A Pedagogical Application, also provides a WACC
calculation guide
III. Risk Analysis: Read items 1A (Risk Factors) and 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in the
10-K financial statements. Then, address the following:
A. How would these risk factors impact the two projects?
B. Consider the risk factors and calculate each project’s risk-adjusted hurdle rate:
i. Scenario A: Is the risk-adjusted hurdle rate higher or lower than the WACC?
ii. Scenario B: Is the risk-adjusted hurdle rate higher or lower than the WACC?
C. How would you mitigate the risks?
Helpful resource for this step: How to Set the Hurdle Rate for Capital Investments. (See more detail in the Module Six Required Resources section.)
Rubric
Guidelines for Submission: Your paper should be 2–3 pages long, double spaced, with 12-pt. Times New Roman font, one-inch margins, APA citations, and at
least two references. Show your WACC calculations either directly in the Word document or attached as a separate Excel file (if you have calculated WACC in an
Excel spreadsheet).
