# Wacc Case

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Wacc Case
X. Weighted average cost of capital (WACC)
The valuation of Abercrombie & Fitch Co. is based discounting future cash flows and economic profit, for that the weighted average cost of capital is needed. The WACC is the opportunity cost when investing in Abercrombie & Fitch Co. opposed to other investments with a similar risk. Investors want their return to excess the WACC before it can be considered a good investment; since people in general are risk averse, they want compensation for taking on risk.
In its most simple form the weighted average cost of capital looks as the following equation (Koller p. 232, 2010):
Equation X – 1
WACC= DVkd1-Tm+EVke
D/V = target level of debt to enterprise value using market-based values
E/V = target level
In rest of this section there will be steps, each estimating the different variables. Keep in mind that estimation is not a single correct answer, but using respected models as estimators will give a good unbiased suggestion with the goal of minimizing errors.

X.1 Estimating current capital structure
To estimate the WACC the capital structure is needed. To determine the current capital structure it is important that market-based value is used, and not the book value.
Some companies trade their debt public, if so the market value of the debt can be determined by using the TRACE pricing database and it would be the ideal method to use. Since in most cases book value reasonably approximates the current market value it will be observed in the Abercrombie & Fitch Co. Annual report and used to determine the capital structure (Koller p. 263, 2010).
To estimate the market value of the company, the number of outstanding shares is multiplied with the stock price at a given time Shares issued and repurchased by the company is not included in the calculation. The Outstanding shares it observed in the annual reports and the historical stock prices is found on the web
First of it has to be determined which index that is most suitable to regress the company against. This all depends where the company is located, since ANF is an American company the most obvious is the S&P 500 and MSCI world Index. It is very important not to use a small index such as a local market, since they can rely on few industries; in that case, the company’s sensitivity would be measured against other industries instead of the total market. For estimating Abercrombie & Fitch Co.’s beta, S&P 500 Index has been chosen, since according to Koller that is the most common used for U.S. stocks (Koller p. 249, 2010). Data used for estimating beta can determine the outcome. Using data from way back can include irrelevant data; for example if a company changes its strategy or capital structure, that would often lead to a change in risk and therefore also beta. For Regression Koller suggest that 5 years or 60 months with monthly observations on return should be used. More frequently return periods can lead to systematic biases and patterns. For the regression between ANF and S&P 500 60 months with monthly observations will be used. Even though the risk of systematic biases in errors are less than with weekly periods, there will still be tested for

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