Urban Outfitters operates specialty apparel, accessories and home goods retail stores under the brand names of Urban Outfitters, Anthropologie, Free heap, Terrain, Leifsdottir and BHLDN. It similarly operates wholesale stores under the brand names of Free People and Leifsdottir brands. The company is headquartered at Philadelphia and has 6,432 employees. It is listed at NYSE and trades under pith URBN1.
In this report we evaluate a capital budgeting toil which the company wishes to undertake. We first calculate the WACC for the company by smell at the capital structure of the company. We then calculate the funds flows of the project and use the WACC as the discounting rate.
In order to exonerate the project fillance/rejection decision, we calculate the payback period, net take quantify, and internal rate of make it, modified internal rate of return and profitability index.
Based on these decision parameters, we undertake the accept/reject decision for the project.
WACC Calculation
Capital structure We first augur the capital structure weights based on the trade values. From the eternal sleep sheet of the company, we find that Urban uses only common loveliness for its long term capital needs. It has a line of reference book but has not utilized it for any amount.
The WACC would only be the cost of equity.
Cost of Equity We calculate the cost of equity using as an average of the cost based on CAPM, DCH and bond yield plus risk premium approach
1. CAPM at a lower place CAPM, cost of equity is calculated as
Cost of equity = Rf + (Rm-Rf) beta where
Rf = risk free rate which is interpreted as the long term rate to match the due date of the project. Since the project is 8 years, we take the 10 year exchequer bond rate as the risk free rate. The occurrent 10 year Treasury bond rate is 2.32%
(Rm -Rf) is the market risk premium and is assumed to be 5.5%
Beta value is taken as the average beta of the figures available from Yahoo, MSN funds and Reuters
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