D3

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School
Harford Community College **We aren't endorsed by this school
Course
CIS 115
Subject
Economics
Date
Oct 29, 2023
Pages
1
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A firm's Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including common shares, preferred shares, and debt" (CFI Team, 2023, p.1). I have a love for Hondas, so I decided to select Honda Motor Company (HMC) as my company. It falls under the manufacturing industry. According to GuruFocus (2023): As of today (2023-10-22), Honda Motor Co's weighted average cost of capital is 2.62%. Honda Motor Co's ROIC % is 3.76 % (calculated using TTM income statement data). Honda Motor Co generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases. (p.1) Some risks that Honda Motor Co. is currently facing that could impact their WACC is rising Japanese Yen rates, natural disasters, and increase competition. According to Jurevicius (2023): More than 88% of Honda's revenue come from international markets, which means that the company has to convert foreign currencies to Japanese Yen in order to calculate its revenues and send the profits back to Japan. Currency rates are volatile and the company's profits and revenue highly depend on the fluctuating exchange rates. The company cannot control the currency exchange rates, therefore it is at risk, if Japanese Yen exchange rates would start to rise. In such case, the company's profits would decrease significantly. The company itself identifies this as a key threat that will negatively affect the company over the next few years.(p.1) The natural disasters disrupt the manufacturing process, which results in lower production of volume and profits. Honda's competitors such as Toyota, Ford, Volkswagen, and Hyundai all have larger budgets, which they can use them to take market share from Honda; hence, Honda is currently experiencing the slowing growth of the automotive markets due to this References CFI Team. (2023, September 27). Definition of WACC. CFI. https://corporatefinanceinstitute.com/resources/valuation/what-is-wacc-formula/ GuruFocus. (2023). Honda Motor Co (HMC) WACC %. GuruFocus. https://www.gurufocus.com/term/wacc/HMC/Weighted+Average+Cost+Of+Capital+ %2528WACC%2529/Honda+Motor+Co+Ltd Jurevicius, C. (2023, March 30). SWOT Analysis on Honda 2023. Strategic Management Insight.https://strategicmanagementinsight.com/swot-analyses/honda-swot-analysis/
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