WACC Analysis of Harley Davidson, Research Paper Example

The abbreviation of WACC is Weighted Average Cost of Capital, which also known as a Hurdle or Discounted Rate. It is the rate which specifically used for the purpose of discounting the future cash flow of a project in order to analyze its effect over the company(Financials.morningstar.com, 2015). This particular report is all about computing the WACC of Harley-Davidson, one of the largest manufacturers of motorcycles in the United States. There are certain questions that needed to be answered for this analysis.

In this part, it is required to compute the WACC of the company. The formula of computing WACC is as follows

r_WACC = (E/E+D) r_E + D/(E+D) r_D(1-T_C)

There is a need to examine the cost of debt of the company. Total Liabilities of Harley Davidson in the financial year 2014 were US$ 6,619 Million. According to the AAA bonding, the cost of debt of similar companies before tax is 4.8%, and the same is applicable on Harley Davison(Investor.harley-davidson.com, 2015). However, the after-tax cost of debt of the company is as follows

= 4.8% * (1-40%)

Cost of Debt = Rd = 2.88%

In order to analyze the cost of equity, it is important to use the CAPM techniques

CAPM = Rrf + Beta (Rm – Rrf)

The Rrf = 2.05% which is the YTM on the 10 year securities in the United States

Rm – Rrf = Market Premium = 4%

Beta = 1.05

= 2.05% + 1.05 * (4%)

CAPM = 6.25%

Weights of Debt and Equity

Debt to Equity of Harley Davidson = 2.27

Weight of Debt = 0.70

Weight of Equity = 0.30

WACC = (0.30) * (6.25) + (0.70) * (2.88%)

= 1.875% + 2.016%

WACC = 3.89%

The data has been collected through the official website of Harley Davidson, and from the annual report of the company. The data is used according to the requirement of the formula. The formula of computing the WACC has been bifurcated into three different scenarios, wherein the cost of debt and equity have been analyzed first, and then put the figures in the respective formula of computing WACC.

There are two main sources which have been used to collect the data for the computation of WACC of Harley Davidson which are the annual reports of Harley Davidson and the financial ratios extracted from Morning Star. The link of both of these mediums are duly mentioned in the reference list, so one can easily cross verify the data according to their own wish, merely to double check the computed result.

According to the result, the computed WACC of the company is only 3.89%, which is extremely low. There is a chance of having a mistake in the analytical procedure or in the collection of data. We have computed the cost of debt with the Pure Play Method in which the cost of debt has been directly applied to the analytical procedure for the similar rated bonds. This particular limitation may arise some mistake in the computation. However, we have full confidence in the calculations and formulas used.

References

Financials.morningstar.com, (2015). Balance Sheet for Harley-Davidson Inc (HOG) from Morningstar.com. Retrieved 9 October 2015, from http://financials.morningstar.com/balance-sheet/bs.html?t=HOG&region=usa&culture=en-US

Google.com, (2015). Harley-Davidson Inc: NYSE:HOG quotes & news – Google Finance. Retrieved 9 October 2015, from https://www.google.com/finance?cid=16754

Investor.harley-davidson.com, (2015). Investor Relations | Harley-Davidson USA | Annual Reports. Retrieved 9 October 2015, from http://investor.harley-davidson.com/phoenix.zhtml?c=87981&p=irol-reportsannual

Treasury.gov, (2015). Daily Treasury Yield Curve Rates. Retrieved 9 October 2015, from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield