Report of the assignment:

A. First of all I select two companies stocks GRICENERAL ELECTRIC and GENERAL MOTER
from www.yahoo.com there in that yahoo page I visit yahoo finance after that I click on
market data than select stock option and then I choose this two companies monthly
stock the companys stock I selected is for the periods of 2011, 2012and 2013.
Report of the General Electric Company (GE) Company A:
A. As I mention above the data and selection of the companies and their stocks. For this
assignment our first requirement was to find out the wacc of the company for that first
we need to calculate weightages of debt (Wd ) ,weightages of equity (We), cost of debt
(kd) and cost of equity (ke).
I. For calculation of weightages of debt first I find total long term liabilities and
total equity for the three years which is Liabilities (2011 345860000 2012
307140000 and 2013 286661000) and Equities(2011 116438000 2012
123026000 and 2013 130566000)
II. After the summation of total long term Liabilities and total equity I find Wd and
We for the three years which is (Wd=total long term Liabilities/ sum of total long
term liability and equity) We= total equity / sum of total long term liability and
equity).
III. After that I average the three years debt and equity for the purpose to find
average Wd and We. Average Wd was 71.64% which we assumed as 70% and
average We was 28.36% which we assumed as 30%. Our debt to equity ratio was
2.33.
IV. Then I calculate the cost of Debt (Kd) for that first I find interest expenses from
the income statement of General electric company for the given three years. By
the help of interest expenses I calculate cost of debt easily which is the division
of interest expenses our total long term liability (kd=interest expenses/total long
term liability).
V. By tacking average of the three years Kd our average Kd we calculated as 3.50%.
VI. Also for wacc we need to calculate tax rate for that I select EBT and income tax
expenses for the given three years from the income statement of General
Electric Company. By the help of that I calculate effective income tax rate for
each periods (Formula is Effective income tax rate= Income Tax Expense/EBT).
VII. For each year effective income tax rate was (2011 28.50%, 2012 15.69%, 2013
4.19%) by tacking average of this three years income tax rate our average
income tax rate we calculated as 16.12% but we assumed 16%.
VIII. For calculation of wacc we need to find out the cost of equity we calculated cost
of equity using capm (capital asset pricing model),.
IX. CAPM=RFR+(*(RM-RFR)
X. RFR is the united states treasury bill rate which is free of default risk some time
having risk but some degree of chances like inflation risk, exchange rate risk etc.
which is already given by the instructor.
XI. We calculate beta () and market return (RM) by using historical prices (Jan 1,
2011-dec 31, 2013) of General Electric company and standard and poor 500 (S&P
500.
XII. By the help of this historical prices I calculate TR of the Market (S&P 500) and TR
General Electric (TRRI)
XIII. Formula for total return is TR=(CLOSING PRICE-BEGENING PRICE)/ BEGENING
PRICE
XIV. After calculating the TR of MR and RI, I calculate the average return of the
market (RM) and average RFR, which is (RM=0.00426) and (RFR=1.84).
XV. Then I calculate the existing beta () of the firm for that I calculate equity risk
premium of GE (ERP RI-RF of GE Y) and Market risk premium (MRP S&P
500X)
XVI. By tacking slope of y and x I calculate existing beta which is 1.00323.
XVII. Now for the calculation of cost of equity for capm we have all the information.
By using capm cost of equity calculated as Ke=(0.55%) which is negative and still
very low so i assumed cost of equity double of cost of debt which is 3.50% so
assumed Ke is 7% or o.07.
2 Now we have all the information for calculating the wacc which is our first requirement
of the assignment.
i) We know that WACC=Wd*Kd(1-T)+We*Ke+Wp*Kp
ii) Wd=70%, We=0.30%, Kd(1-t)=0.029, Kd=0.035, =1.0032, so by putting the
values we calculating WACC is 0.04158 or 4.16%.
B. Now our second requirement is to calculate the optimal capital structure. For that first
build different firm structures with deferent debt and equity ratio by the deference of
10%.for that we also find different betas like our exiting beta is levered which is 1.0032
we also calculated unlevered beta using levered beta formula is (Bu

()(

)
)
unlevered beta calculate is 0.737647 using this unlevered beta we calcite the levered
beta for the different time periods using formula as BL ( ) (

)
I) Kd for existing Beta is 4.50 for the other periods we calculate Kd is 5% increase
and decrease.
II) We calculate Ke using capm using the same RFR , beta, and RM. Which is
negative in each capital structure so we assumed ke is the double of ke which is
(Kd*2).
III) We calculate wacc using the same method (formula) mentioned above.
IV) Than for the calculation of value of firm (v=FCF(1+g)/(wacc-g). for the calculation
of FCF(formula is FCF=OCF-NOWC-F.ASSETS) where is operating cash flows
equal to (OCF=EBIT(1-T)+DEPRECIATION) We use EBIT value of the last year
which is 26267000, EBIT(1-T)=22064280, OCF=31826280, NOWC=12420000,
F.Assets=(24586000) and FCF=43992280
V) Now for the calculation of the value of firm we also need to calculate the growth
rate of the firm (GROWTH RATE=ROE*(1-PAYOUT RATIO). Where is ROE=11.07%
and Payout ratio=63.00% and growth rate =0.040959.
VI) Now we have the entire requirements to calculate value of the firm. We know
that v=FCF(1+g)/(wacc-g). by putting the values we have find firm values of
different capital structure.
VII) Our optimal capital structure is:
DE
BT
EQUI
TY
D/
E Kd
Kd(1-
T) Ke
Assumed
Ke
WAC
C Vo E
10
% 90%
0.1
1
0.8064
94
3.50
%
2.94
%
-
1.83765
64 0.07
0.065
94
1848359
039
1663523
136

Where WACC is low than each capital structure and where the firm value is higher than all so
we can say its the best capital structure for the firm.
C. Our third and last requirement is to calculate business risk, financial risk and total risk of
the firm.
I. For that first we need EBIT and N.I values for the three given years. By the help
of that values I calculate the std of EBIT (std of EBIT=1889389.3) and std of N.I=
261717.83.
II. After that I calculate average of EBIT and N.I which is (EBIT avg=17487000) and
(N.I avg=13272667.
III. After that I calculate business risk, financial risk and total risk easily.
IV. Business risk is simply the CV of EBIT=std of EBIT/ avg of EBIT =0.1080
V. Where is Firm risk equls to std of N.I/avg of N.I =0.0197
VI. And financial risk is simply the deference between business risk and firm risk
which is (0.0883).
Company B: General Motors Company (GM)
A) Our first requirement Is to find out the wacc of the company for that first we need to
calculate weightages of debt (Wd ) ,weightages of equity (We), cost of debt (kd) and
cost of equity (ke) listed above in company A.
XVIII. For calculation of weightages of debt first I find total long term liabilities and
total equity for the three years which is Liabilities (2011 52386000 2012
58430000 and 2013 60758000) and Equities(2011 38120000 2012 36244000
and 2013 42607000)
XIX. After the sum of total long term Liabilities and total equity I find Wd and We for
the three years which is (Wd=total long term Liabilities/ sum of total long term
liability and equity) We= total equity / sum of total long term liability and
equity).
XX. After that I average the three years debt and equity for the purpose to find
average Wd and We. Average Wd was 59.46% which we assumed as 60% and
average We was 40.54% which we assumed as 40%. Our debt to equity ratio was
1.50.
XXI. Then I calculate the cost of Debt (Kd) for that first I find interest expenses from
the income statement of General Motors company (GM) for the given three
years. By the help of interest expenses I calculate cost of debt easily which is the
division of interest expenses our total long term liability (kd=interest
expenses/total long term liability).
XXII. By tacking average of the three years Kd our average Kd we calculated as 0.81%
which is very low so we assumed Kd as US treasury ytm (10 years)=4.50%.
XXIII. Also for wacc we need to calculate tax rate for that I select EBT and income tax
expenses for the given three years from the income statement of General
Motors Company (GM). By the help of that I calculate effective income tax rate
for each periods (Formula is Effective income tax rate= Income Tax
Expense/EBT).
XXIV. For each year effective income tax rate was (2011 (1.20%), 2012 121.38%, 2013
28.52%) by tacking average of this three years income tax rate our average
income tax rate we calculated as 49.57% but we assumed 50%.
XXV. For calculation of wacc we need to find out the cost of equity we calculated cost
of equity using capm (capital asset pricing model),.
XXVI. CAPM=RFR+(*(RM-RFR)
XXVII. RFR is the united states treasury bill rate which is free of default risk some time
having risk but some degree of chances like inflation risk, exchange rate risk etc.
which is already given by the instructor.
XXVIII. We calculate beta () and market return (RM) by using historical prices (Jan 1,
2011-dec 31, 2013) of General Motors company (GM) and standard and poor
500 (S&P 500.
XXIX. By the help of this historical prices I calculate TR of the Market (S&P 500) and TR
General Electric (TRRI)
XXX. Formula for total return is TR=(CLOSING PRICE-BEGENING PRICE)/ BEGENING
PRICE
XXXI. After calculating the TR of MR and RI, I calculate the average return of the
market (RM) and average RFR, which is (RM=0.00426) and (RFR=1.84).
XXXII. Then I calculate the existing beta () of the firm for that I calculate equity risk
premium of GE (ERP RI-RF of GE Y) and Market risk premium (MRP S&P
500X)
XXXIII. By tacking slope of y and x I calculate existing beta which is 0.99655 OR 99.7%.
XXXIV. Now for the calculation of cost of equity for capm we have all the information.
By using capm cost of equity calculated as Ke=0.43039 or 43%.
XXXV. Now we have all the information for calculating the wacc which is our first
requirement of the assignment.
iii) We know that WACC=Wd*Kd(1-T)+We*Ke+Wp*Kp
iv) Wd=60%, We=40%, Kd(1-t)=0.225, Kd=0.45, =0.997, so by putting the values
we calculating WACC is 0.3071555 or 30.72%.
B) Now our second requirement is to calculate the optimal capital structure. For that first
build different firm structures with deferent debt and equity ratio by the deference of
10%. For that we also find different betas like our exiting beta is levered which is 0.997
we also calculated unlevered beta using levered beta (formula is (Bu

()(

)
)
unlevered beta calculate is 0.5697143 using this unlevered beta we calculate the levered
beta for the different time periods using formula as BL ( ) (

)
VIII) Kd for existing Beta is 4.50 for the other periods we calculate Kd is 5% increase
and decrease.
IX) We calculate Ke using capm using the same RFR , beta, and RM. Which is
negative in each capital structure so we assumed ke is the double of ke which is
(Kd*2).
X) We calculate wacc using the same method (formula) mentioned above.
XI) Than for the calculation of value of firm (v=FCF(1+g)/(wacc-g). for the calculation
of FCF(formula is FCF=OCF-NOWC-F.ASSETS) where is operating cash flows
equal to (OCF=EBIT(1-T)+DEPRECIATION) We use EBIT value of the last year
which is 7792000, EBIT(1-T)=3896000, OCF=12051000, NOWC=3085000,
F.Assets=3549000 and FCF=3549000
XII) Now for the calculation of the value of firm we also need to calculate the growth
rate of the firm (GROWTH RATE=ROE*(1-PAYOUT RATIO). Where is ROE=10.89%
and Payout ratio=20.00% and growth rate =0.08712 or 8.71%.
XIII) Now we have the entire requirements to calculate value of the firm. We know
that v=FCF(1+g)/(wacc-g).
XIV) By putting the values we have find firm values of different capital structure.
XV) Our optimal capital structure is:
DEB
T
EQUIT
Y D/E Kd
Kd(1-
T) Ke WACC Vo E
80% 20%
4.0
0
1.709142
9
5.50
% 3.91%
0.728
4
17.69
%
42968417.5
5
8593683.50
9

Where WACC is low than each capital structure and where the firm value is higher than all so
we can say its the best capital structure for the firm.
C) Our third and last requirement is to calculate business risk, financial risk and total risk of
the firm.
i) For that first we need EBIT and N.I values for the three given years. By the help of
that values I calculate the std of EBIT=17441061.25 and std of N.I= 1604550.
ii) After that I calculate average of EBIT and N.I which is EBIT avg=(3565667) and N.I
avg=5404667.
iii) After that I calculate business risk, financial risk and total risk easily.
iv) Business risk is simply the CV of EBIT=std of EBIT/ avg of EBIT =(4.8914)
v) Where is Firm risk equls to std of N.I/avg of N.I =0.29688
vi) And financial risk is simply the deference between business risk and firm risk which
is 5.18827.