FIN202 Instructor: Dr.

Yudan Zheng

Term Project

It is a group term project. Each group will have three or four students. However, the stage of the data
collection is on an individual level. That is, each student needs to collect their own data. The project
is used to evaluate the following learning objectives in FIN202:

Apply financial concepts, analytical tools, and theories to propose and analyze financial
management decisions related to capital budgeting and capital structure management.
(Related to finance program learning objective 1.2.)

Project Description:

You have recently been hired by Robert Computer, Inc. (RCI), in its relatively new treasury
management department. RCI was founded eight years ago by Bob Robert and currently operates 74
stores in the Southeast. The company is privately owned by Bob and his family, and it had sales of
$100 million last year.

RCI primarily sells to customers who shop in the stores. Customers come to the store and talk with a
sales representative. The sales representative assists the customer in determining the type of
computer and peripherals that are necessary for the individual customer’s computing needs. After the
order is taken, the customer pays for the order immediately, and the computer is made to fill the
order. Delivery of the computer averages 15 days, and it is guaranteed in 30 days.

RCI’s growth to date has come from its profits. When the company had sufficient capital, it would
open a new store. Other than scouting locations, relatively little formal analysis has been used in its
capital budgeting process. Bob has just read about capital budgeting techniques and has come to you
for help. For starters, the company has never attempted to determine its costs of capital, and Bob
would like you to perform the analysis. Because the company is privately owned, it is difficult to
determine the cost of equity for the company. Bob wants you to use the pure play approach to
estimate the cost of capital for RCI, and he has chosen Apple as a representative company. The
following questions will lead you through the steps to calculate this estimate:

1. Debt and equity: Most publicly traded corporations are required to submit quarterly (10Q)
and annual reports (10K) to the SEC detailing the financial operations of the company over
the past quarter or year, respectively. These corporate filings are available on the SEC Web
site at www.sec.gov. Go to the SEC Web site; follow the “Filings”-“Company Filings
Search” link; enter “Apple Inc”; and search for SEC filings made by Apple. Find the most
recent 10-K, and download the form. Look on the balance sheet and you can find the book
value of debt. If you look further down the report, you should find a section titled
“NOTES TO CONSOLIDATED FINANCIAL STATEMENTS” that will provide a
breakdown of Apple’s long-term debt for book value. What is the total book value of long
term debt? What is the total book value of all the fixed-rate notes?

2. To estimate the cost of equity for Apple

(1) Go to finance.yahoo.com and enter the ticker symbol AAPL. Follow the links to answer
the following questions: What is the most recent stock price listed for Apple? What is
FIN202 Instructor: Dr. Yudan Zheng

the market value of equity, or market capitalization? What is the most recent annual
dividend? How many times that dividends have been paid in the history of Apple? Can
you use the dividend discount model in this case? What is the beta for Apple?

(2) Now go back to finance.yahoo.com and follow the “Markets” - “US Treasury Bonds
Rates” link. What is the yield on three-month (13-week) Treasury bills? (Note: The
numbers in the table are in percentage format.) Using the historical market risk premium
8%, what is the cost of equity for Apple using CAPM?

3. You now need to calculate the cost of debt for Apple. Go to http://finra-
markets.morningstar.com/BondCenter/Default.jsp, enter Apple Inc as the company, and find
the following information for each of Apple’s fixed-rate bonds: bond symbol, maturity,
coupon rate, book value, bond price, and yield to maturity. What is the weighted average
cost of debt for Apple using the market value of bonds as the weights?

Hint: Bond price has been provided in the percentage of the face value (book value). When
you click each bond symbol, you can see the book value of each bond is listed as “Original
Offering.” Yield for each bond has also been provided, in percentage format. You just need
to calculate the weighted average yield to maturity by using the market value of each bond
as the weight.

Note: The website shows all the outstanding bonds that Apple has, including floating-rate
bonds and fixed-rate bonds. However, please include only the fixed-rate bonds in your
calculation.

4. You now have all the necessary information to calculate the weighed average cost of capital
for Apple. Calculate this using market value weights, assuming Apple has 35 percent
marginal tax rate.

5. You used Apple as a pure play company to estimate the cost of capital for RCI. Are there
any potential problems with this approach in this situation?

Requirement:

Stage 1: Individual Data Collection

In the first stage, you need to answer all the questions (except the highlighted three questions,
which are to be completed during the stage of group work) in Step 1-3 in the above project
description based on the information you gather from the specified websites.

You also need to save/print out the webpages of information you obtained as an appendix in
your submission. In other words, the main part of your data submission answers each of the
questions with referring to the appendix, where you attach the webpages of information as an
evidence of support for your collected data to answer project questions. When you answer
questions, please type.

Please note that in Step 3 even though you don’t need to calculate cost of debt at this point,
you still need to find for each Apple’s fixed-rate bond the following information: bond symbol,
maturity, coupon rate, book value, bond price, and yield to maturity.
FIN202 Instructor: Dr. Yudan Zheng

After you obtain the data for each bond, please input and organize all the bond information into an
Excel file. As you are expected to print the original webpages from which you obtained the
information as in the appendix, in terms of bond data, there should be at least one appendix page
corresponds to one individual bond. But since the number of bonds is many, to save papers I would
ask you to print out webpages of at least 5 bonds for the appendix purpose. (But your Excel should
include information for ALL the bonds.)

In sum, for the first stage assignment, you need submit: (1) Your data collection report where you
type your answers to the assigned questions and refer to the evidence shown in your appendix; (2)
Your appendix which contains original data you collect from data sources; (3) Bond list Excel file
which includes the required information (bond symbol, maturity, coupon rate, book value, bond price,
and yield to maturity) for each of the fixed-rate bonds.

Stage 2: Group Project Report

Prepare an analysis report to be submitted to the owner Bob. You should include the following
information in your report:
(1) Cover page. Please use a business design. You should also include the group number and
your names.
(2) Background and objective of the project.
(3) Data collections and calculations. It should include all the information collected from
different financial sources, your detailed analysis and calculations (including formula that
you use).
(4) Conclusions and limitations of the estimation.
(5) Appendix. Please print out the information you obtain from the specified websites for your
calculations as the appendix.

Please also see the attached evaluation rubric for the detailed requirements for each of the above
sections.

Project due policy:

Please check the deadlines for both the project data collection (on individual level) and for the
final project report (on group level). Each assignment should be submitted on time. The
assignment handed in during the week after it is due will be penalized by 25% deduction. The
assignment handed in during the second week after it is due will be penalized by 50% deduction.
No submission will be acceptable after that. The project should be typed.

3
 FIN202
Evaluation Rubric for FIN202 Project Report
Criteria A (100 points)
Cover Page Excellent business design closely
(5%) related to the project.
5%×100=5 points
Background and Objectives Clearly explain the background
(10%) and condition of the company,
the reasons for the company to
start the project, and why the
pure play approach is used to
estimate the cost of capital.
10%×100=10 points
Data Source For each of the first four
(15%) questions listed in the project
assignment: specify the source of
financial data; exhibit in the
appendix the raw data table
collected from the source for the
calculations.
Data 15%×100=15 points
Collections
and
Calculations Calculations For each of the first four
(30%) questions listed in the project
assignment: use appropriate
information from the collected
data; apply correct models in the
calculations; obtain correct
calculation results.
30%×100=30 points
B(80 points)
Clear design with a title.
5%×80=4 points
Explain two of the following
components: the background of the
company; the reasons for the
company to start the project; why
the pure play approach is used to
estimate the cost of capital, but do
not have all of them.
10%×80=8 points
For each of the first four questions
listed in the project assignment:
either specify the source of
financial data; or exhibit in the
appendix the raw data table
collected from the source for the
calculations, but do not have both
components.
15%×80=12 points
For each of the first four questions
listed in the project assignment:
use appropriate information from
the collected data; apply correct
models in the calculations.
However, make some mistakes in
the calculations.
30%×80=24 points
Instructor: Dr. Yudan Zheng
C(60 points)
The design is unrelated to the
project.
5%×60=3 points
Explain only one of the
following components: the
background of the company; the
reasons for the company to start
the project; why the pure play
approach is used to estimate the
cost of capital.
10%×60=6 points
For some of the first four
questions listed in the project
assignment: either specify the
source of financial data; or
exhibit in the appendix the raw
data table collected from the
source for the calculations, but
miss both components for at
least one question.
15%×60=9 points
For at least two of the first four
questions listed in the project
assignment: use appropriate
information from the collected
data; apply correct models in the
calculations.
30%×60=18 points
D(40 points)
No cover page.
5%×40=2 points
The section of background and
objectives is missing.
10%×40=4 points
For each of the first four
questions listed in the project
assignment: neither specify the
source of financial data; nor
exhibit in the appendix the raw
data table collected from the
source for the calculations.
15%×40=6 points
For each of the first four
questions listed in the project
assignment: neither use
appropriate information from the
collected data; nor apply correct
models in the calculations.
30%×40=12 points
FIN202 Instructor: Dr. Yudan Zheng

Explanations For the section of data collections
(10%) and calculations: provide clear
explanations in the analysis;
clearly and correctly answer each
of the first four questions in the
assignment with referring to the
analysis; the section is well
structured.
10%×100=10 points
Clearly summarize the estimate
of the cost of capital for the
company based on the
Conclusions and calculation; provide an insightful
Implications answer to the last question listed
(20%) in the project assignment
regarding the limitations of the
estimate.
20%×100=20 points
The report is well structured with
a title for each section; no
Writing grammatical or spelling errors.
(10%) 10%×100=10 points
For the section of data collections
and calculations, meet two of the
following requirements: provide
clear explanations in the analysis;
clearly and correctly answer each
of the first four questions in the
assignment with referring to the
analysis; the section is well
structured.
10%×80=8points
Summarize the estimate of the cost
of capital for the company based
on the calculation; provide an
answer to the last question listed in
the project assignment regarding
the limitations of the estimate, but
the summary or the answer has
some unclear points.
20%×80=16 points
The report is generally clear but
the transition or flow is difficult in
some places; or few grammatical
/spelling errors.
10%×80=8 points
For the section of data
collections and calculations,
meet only one of the following
requirements: provide clear
explanations in the analysis;
clearly and correctly answer
each of the first four questions
in the assignment with referring
to the analysis; the section is
well structured.
10%×60=6 points
Either summarize the estimate
of the cost of capital for the
company based on the
calculation, or answer the last
question listed in the project
assignment regarding the
limitations of the estimate, but
do not have both components.
20%×60=12 points
The concepts and ideas
presented in the report are
loosely connected; or several
grammatical/spelling errors.
10%×60=6 points
For the section of data collections
and calculations: nether provide
clear explanations in the analysis;
nor answer the first four
questions in the assignment with
referring to the analysis; the flow
of the section is difficult to
follow.
10%×40=4 points
No conclusions.
20%×40=8 points
The concepts and ideas presented
in the report are unclear; or
pervasive grammatical/spelling
errors.
10%×40=4 points

Criteria A B C D
Cover Page
Background and Objectives
Data Source
Calculations
Explanations
Conclusions and Implications
Writing