You work at Merck & Company (MRK), a well-known pharmaceutical company. Part of your job is...
You work at Merck & Company (MRK), a well-known pharmaceutical company. Part of your job is to complete business case analyses for different drugs under development. One day, you are assigned to complete an analysis on a drug that has, so far, shown great promise for treating pancreatic cancer. After completing your revenue forecast under the assumption that the drug passes its next round of testing, you know that you need to discount those cash flows to find the present value. The drug isn't the most risky project the company has ever tried to produce, but it also is not the least risky. You decide that the best way to treat these cash flows is as if the drug was an average risk project for the firm. Is the WACC the appropriate discount rate to use for this project? Why or why not?
| Now calculate the following using the publicly-available information below. | ||||
| WACC: _______________________________ | ||||
| MRK common stock beta: | 0.6 | |||
| YTM on 10-year US Treasury bond: | 3.12% | |||
| Average annual return on Vanguard Total Market Fund: | 10.55% | |||
| Current MRK price per common share: | $73.81 | |||
| Number of MRK common shares outstanding (in millions): | 2,678 | |||
| Corporate tax rate: | 21% | |||
| The company has the following long-term debt outstanding. (Assume this is the only debt the firm has.) | ||||
| Bond issue | Coupon Rate | Book Value (in millions $) |
Market Price Quote (per bond) | YTM |
| 2.75% notes due 2025 | 2.750% | 2,488 | 94.8400 | 3.7100% |
| 3.70% notes due 2045 | 3.700% | 1,973 | 90.9900 | 4.3200% |
| 2.80% notes due 2023 | 2.800% | 1,744 | 97.1700 | 3.5100% |
| 5.00% notes due 2019 | 5.000% | 1,260 | 101.1400 | 3.2800% |
| 4.15% notes due 2043 | 4.150% | 1,237 | 97.6400 | 4.3500% |
| 1.85% notes due 2020 | 1.850% | 1,232 | 98.5000 | 3.0900% |
| 2.35% notes due 2022 | 2.350% | 1,220 | 96.9000 | 3.3900% |
| 1.125% euro-denominated notes due 2021 | 1.125% | 1,185 | 103.0500 | 0.9000% |
| 1.875% euro-denominated notes due 2026 | 1.875% | 1,178 | 106.6100 | 1.0100% |
| 3.875% notes due 2021 | 3.875% | 1,140 | 101.1200 | 3.3700% |
| 2.40% notes due 2022 | 2.400% | 993 | 96.2900 | 3.4600% |
| 6.50% notes due 2033 | 6.500% | 729 | 138.4460 | 4.2735% |
| 0.50% euro-denominated notes due 2024 | 0.500% | 591 | 98.8200 | 0.7000% |
| 1.375% euro-denominated notes due 2036 | 1.375% | 587 | 94.2000 | 1.7600% |
| 2.50% euro-denominated notes due 2034 | 2.500% | 585 | 111.6900 | 1.6700% |
| 3.60% notes due 2042 | 3.600% | 489 | 99.2500 | 3.6327% |
| 6.55% notes due 2037 | 6.550% | 415 | 141.6800 | 4.3373% |
| 5.75% notes due 2036 | 5.750% | 338 | 116.5775 | 4.7940% |
| 5.95% debentures due 2028 | 5.950% | 306 | 121.7100 | 4.3910% |
| 5.85% notes due 2039 | 5.850% | 270 | 119.4500 | 4.7831% |
| 6.40% debentures due 2028 | 6.400% | 250 | 113.5100 | 5.3414% |
| 6.30% debentures due 2026 | 6.300% | 135 | 114.1305 | 5.0833% |
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follow.
Calculating the Weighted Average Cost of
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number of bonds and then multiply by the price of the bond
(remember that bond prices are quoted in 100s, but are really
1000s).
If there is no bond price,...
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