Financial Analysis Report for McCumber Energy

1. Use the scenario below to answer the questions.

2. Use MS Excel or the BA II plus calculator for calculations. Use MS Excel spreadsheets for charts and to summarize your data

3. Submit your report in either Word or MS Excel format. If using Word, attach supporting Excel documents to the D2L assignment tool.

Find the following Betas for the companies listed below: 

Assuming a risk free rate (R_f) of 2% and the Return from the market (R_m) of 6.5% calculated the expected return of each company based on the Capital Asset Pricing Model.

Re-order your list from the lowest beta to the highest and compare their expected return.

a. Comment on your results.  (Hint: Look at the grouping of the companies, and the value of betas from 0 to 0.5, from 0.5 to 1, from 1 to 1.25 and 1.25 and up)

b. What does the value of beta tell us about a company? What does the value of beta and CAPM tell us about the risk in investing in a company?

Given the following information for McCumber Energy:

Debt – 7,000 with 6% yield to maturity, the bonds make semi-annual payments.

Preferred shares – 15,000 shares paying a dividend of $3.65 per preferred shares outstanding currently selling at $72 per share

Common shares - 300,000 common shares outstanding, selling at $55 per share.

McCumber Corporate Tax Rate: 35%

Table 1 - Market data:

a. Calculate the average Risk free rate (R_f), Return from the market (R_m) and beta (β) from data collected in the last ten years in Table 1.

b. Calculate the cost of debt, cost of preferred shares and cost of common shares.  Note: Use CAPM for the cost of common shares using your averages for R_f, R_mand Beta

c. Calculate the weighted average cost of capital (WACC) for McCumber Energy.

Calculate the weighting of each company from your portfolio based on the market value in the investment in each of the four “FANG”.

Using a risk-free return of 2% and a stock market return of 6%, calculate the following:

a. Weightings of each company on your portfolio (3 marks)

b. Find the betas from each company using (3 marks)

c. Expected return from each company based on CAPM  (4 marks)

Present your financial data in a table similar to Table 1 on the following page.