I am trying to complete this practice problem in preparation for a final assignment.
I would like to see it done correctly so i can point out where i am going wrong
Calculate the cost of capital (show calculations) for Harley Davidson using the
Weighted average cost of capital method using the following information from their annual report.
The weighted average cost of capital is found by multiplying the various components of the capital structure (debt and equity) with their respective costs and then adding them up. Then dividing this sum by the total capital to get the WACC. In this situation, we have to use only the annual report to get the data.
Calculating the cost of equity - The cost of equity can be calculated by using the dividend discount model. For this, first we find the growth rate of dividends. From the annual report, we see that the dividends have increased from $0.035 to $0.405 over the period 1994 to 2004 (page 38). We can find the compound rate of growth using the compound interest formula which is
CI = P * (1+r/100)^n
Here CI is 0.405, P=0.035 , n= 10 years, we need to get r. Substituting in the equation, we get
The solution explains how to calculate the WACC using an annual report.