Analysis of the Company’s WACC
he present value shows the current value of the Company’s liabilities. On the equity side, the Company has 326,000,000 outstanding shares as of the end of 2008. The market value per share of common stock as of 11:59 AM EDT of June 24, 2009, is $11. 49 giving us a total common shares value of $3,745, 740, 000. It is imperative that an expected rate of return is computed on the investments on shares of stocks. This rate of return measures the risk involved in investing in one share of stock of the Company relative to the risk of the stock market. market. The company’s WACC appears low considering that it is a 5. 5Billion dollar company in terms of the market value of equity. A major part of the reason is the company’s low cost of debt, in large part is due to the tax shield provided by its interest payments. It seems that the American government controls all its firms as all taxes, if added up, provides the national cash registry of more than half of a corporation’s NET income. Corporations might be driven to debt-financing in order to avail of the tax shield provided by interest payments as this might prove to be cheaper than issuing capital stocks. A WACC of 5. 04% means the Company must earn a return of 5. 04% on all its assets and business operations in order to MAINTAIN the current stock price at $11.
49 per share. If the Company. wants its stock price to go higher, it must achieve a return rate greater than 5. 04% The Company appears to be safe in maintaining its current stock price of $11. 49, given that the WACC is within that of the expected return from the market of investors provided by S & P 500 Profit and growth for the years 2005-2012. There are a number of investments out there wherein investors can expect a return of as much as 5. 5%. Lastly, given that the company’s Beta of 1. 78% is considered to be riskier than the market as a whole, it also means that the Company has a higher potential for return as this WACC is indicating. Conclusion Given the state of recession the country is experiencing today, the market prices are better indicators of a corporation’s performance rather than financial statements based on historical value. These market prices, however, are very volatile. Before management makes a decision, it might be prudent to consistently update itself on the latest quotations of its company as information change so rapidly.
Reference
- The Limited Brands, Inc. (n. d. ). About our company.
- http://www. limitedbrands.com/about/index.jsp Wikipedia (n. d. ).The weighted average cost of capital.
- http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital Finance Scholar (n. d. ) Weighted Average Cost of Capital (WACC) – Capital Structure of Corporations.
- http://www.financescholar.com/wacc.html Securities and Exchange Commission.
- http://www.secinfo.com/dsVQx. 11Ds.htm Nasdaq (June 24, 2009), LTD: Stock Quote and Summary Data.
- http://quotes.nasdaq.com/asp/SummaryQuote.asp? symbol=LTD&selected=LTD Securities and Exchange Commission. (July 12, 2007) FWP. Limited Brands Inc.
- http://www.secinfo.com/d14D5a. u4MK9.htm Securities and Exchange Commission. (n. d. ).
