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Cost of Capital for Sprint Nextel:
Based on the Sprint Nextel financial statements, compute weighted-average cost of capital (WACC) as of the end of 2006. Layout your analysis as follows, explaining your reasoning in detail and provide numerical detail for the computations of WACC.
1. Determine which items of debt are to be included for the WACC computation.
2. Determine the interest rate for debt and convert it to an after-tax cost of debt. You will need to determine the effective tax rate.
3. Use the capital asset pricing model (CAPM) to determine cost of equity. Assume the average market premium is 5% and a beta of 1.25. You will need to determine the risk-free rate as of 12/31/2006.
4. To derive WACC it is necessary to derive weightings for the debt component and the equity component of the capital structure (the two weightings sum to 1.0 or 100%). The book value of debt is typically used (the items in #1 above). For equity weighting, the text suggests using either the book value of equity (BVE) or the market value of equity. Prepare WACC computations based on BE weightings.
[max 2 pages]
ATTACHED: Attached to the directions is the Sprint Nextel Information needed to complete this case write up.
There is no need to restate facts from the case unless it specifically supports a claim. Don’t waste precious space on an introduction or conclusion, simply rehashing items from the reading. Get straight to the point, provide an answer to the question and support it with relevant items from the case. On this point, be very specific in your claims and accompanying support. In other words, be very pointed and concise your writing. Be careful not to repeat yourself or use the same idea more than once. At the same time, use the space given to elaborate on your ideas and support your conjecture. Clearly delineate your ideas with the use of paragraphs and sentences that directly address the questions. Try to rid your writing of common grammatical errors such as mixing tenses or pronouns in a sentence. Try not to use jargon or slang; write in a professional manner.
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