Do Stocks section only; do not consider Bonds portion posted just for your information only:

· **Calculating Cost of Capital (WACC)**

You are the financial manager for Devon Energy. To evaluate an upcoming expansion project, you would like to compute cost of capital for the firm. Using market data, please compute cost of capital for your firm. Explain the reason and process for computing your firm’s cost of capital.

*Bonds:*

Click on the following link to determine Devon’s before take cost of bond (YTM) in today’s market. Use the bond that has the longest maturity

http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=dvn. Be sure to adjust for tax effect. YTM * (1 – tax rate for Devon). Obtain debt ratio value from the same page.

Stocks DO this Part only; do not consider Bonds portion is for your information only:

*Stocks:*

You have decided to use the following financial CAPM model:

Cost of common=Risk-free rate + (market return – risk free rate) * beta

· Beta value can be found on finance.yahoo.com

· Risk-free rate is 10-year Treasury bond rate.

· Market rate of return is 5-year average of S&P 500 rate of return (please Google)

* *

· *Weighted Average Cost of Capital (WACC):* See examples in my lecture notes to compute WACC.

** **

Subject | Business |

Due By (Pacific Time) | 02/28/2015 12:00 am |

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