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Caterpillar Cost of Capital

Caterpillar Cost of Capital. Mod 6 Kevin Lenart. Caterpillar.

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Caterpillar Cost of Capital

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  1. Caterpillar Cost of Capital Mod 6 Kevin Lenart

  2. Caterpillar • “With 2012 sales and revenues of $65.875 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services and Progress Rail Services.” (“Company,” caterpillar.com)

  3. Caterpillar (cont.) • Segments • Construction Industries – infrastructure and building construction • Energy and Power Systems – energy solutions and applications • Resource Industries – mining, lumber • Customer and Dealer Support – support, parts, training • Financial Products – financing • 2012 • Ranked 46 on Fortune 500 list • $2.5 billion spent on R&D • Record sales, revenues, profits

  4. 3 Costs of Capital • Cost of Enterprise Capital • Risk of enterprise operations • Risks of producing and selling equipment, difficult to measure • Cost of Debt Capital • Risk that company will default • Risk to debt holders • Cost of Equity Capital • Risk of equity holders receiving distributions • Risk surrounding dividend payments and increases in equity value

  5. Determining Cost of Enterprise Capital (rent)

  6. Cost of Equity – CAPM req = α + (β x rmkt)

  7. Beta Data

  8. Beta Regression Alpha = -.0039…“excess returns” intercept Beta = 1.81…stock reaction to market

  9. Beta from Various Sources • Google = 1.82 • Nasdaq = 0.92 • MSN = 1.82 • Reuters = 1.80 • Yahoo = 1.64 • Scottrade = 1.80 • NYSE = 1.80 • TD Ameritrade = 1.80 • Morningstar = 1.66 • E*Trade = 1.80 • CNBC = 1.80 • Zacks = 1.82 • Value Line = 1.30 • My Beta = 1.81, since it is close to the majority I will use it

  10. Cost of Equity – CAPM req = α + (β x rmkt) req = -.0039 + (1.81 x 5.00%) req = 8.66% rmkt at 5.00% based on trend of lower returns

  11. Cost of Debt – Method #1

  12. Cost of Debt – Method #2 I will use Cost of Debt = 4.79%

  13. Cost of Enterprise Capital

  14. Updated DCF – My Calculation Change from 59,608

  15. Updated DCF – Bloomberg Change from 59,608

  16. Sources • "Caterpillar Form 10-K." Caterpillar.com. Caterpillar, 19 Feb. 2013. Web. 14 Jan. 2014. • "Company." Caterpillar.com. Caterpillar, 2013. Web. 14 Jan. 2014. • "Fortune 500 2012: Industry: Construction and Farm Machinery." CNNMoney. Cable News Network, 21 May 2012. Web. 14 Jan. 2014.

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