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 Instructor: Dr. Yudan Zheng

Evaluation Rubric for FIN202 Project Report

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

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

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