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Market Cap (E): 63.97 Total Debt (D): 38.32 Weight of Equity Capital (We): 62.54% Weight of Debt Capital (Wd): 37.46%

USING EXCEL FUNCTIONS IF NEEDED PLEASE

2a) From Ch. 10 HW Part B, Application 1, we find that CAT longest-maturity bond's yield-to-maturity is 3.504% per year. This data can be used to measure CAT's cost of longest-term debt, R_d;

2b) From Ch. 10 HW Part B, Application 2, we find that CAT stock's required return is 6.97% per year, based on the calculation of dividend growth model DGM, R (alternative 1) = D₀(1+g)/P₀ + g. (Be careful, do NOT add P₀ and g together! The correct algebra steps shall be D0 divided by (1 + g), and then divided by P0, and then add g.) This data can be used as one alternative to measure CAT's cost of common stock equity, R_e;

2c) From Ch. 13 HW Part B, we find that CAT stock's required or expected return is 13.69% per year, based on the calculation of capital asset pricing model CAPM, R (alternative 2) = R_f + BETA* (R_m - R_f). This data can be used as another alternative to measure CAT's cost of common stock equity R_e.

2d) Because neither alternative is perfect, let us calculate the average of two alternatives (6.97% and 13.69%) to get the best estimate of CAT's R_e.

Hints: Neither DGM nor CAPM is perfect (the former uses current data but ignores market risk, can't be applied on stocks that pay no dividends, so it is "current but not stable"; the latter considers market risk but relies on outdated historical average data, can be applied on stocks that pay or do not pay dividends, so it is "stable but not current"). Thus, the best method to estimate Re shall be "the average of both DGM and CAPM calculation outcomes."

2e) An applicable corporate tax rate is given as T_c = 21% (since the 2018 tax cut, but without considering state and local tax yet), a flat rate for all US firms including CAT.

2f) Based on all these collected data of W_d, W_e, R_d, R_e and T_c, compute CAT's WACC.

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