Domino's and Papa John's Cost of Capital (Weighted Average Cost of Capital)

Hello Everyone!

This is post 3 in my blog post series on valuing 2 publicly traded pizza companies!

In the first blog post I covered how to calculate the Cost of Equity for Domino's and Papa John's. You can review that blog post here https://peakd.com/hive-185582/@hurtlocker/calculating-the-cost-of-equity-for-dominos-and-papa-johns.

In the second blog post I covered how to calculate the Cost of Debt for Domino's and Papa John's. You can review that blog post here https://peakd.com/hive-185582/@hurtlocker/calculating-the-cost-of-debt-for-dominos-and-papa-johns.

What is the Cost of Capital of a Firm?

The Cost of Capital of a firm is the firm's combined cost of capital for it's equity, debt, and preferred stock. You can calculate the firm's cost of capital by doing an average of its costs that are weighted by it's various forms of capital.

The sum of all the forms of capital is known as the firm's Enterprise Value. The Enterprise Value is going to be the denominator used for our weighted average.

Calculating the Enterprise Value for Domino's and Papa John's?

Enterprise Value = Equity Value + Net Debt Value + Preferred Stock Value

For the Equity Value, we can just use each firm's Market Capitalization published on yahoo finance.

Market Cap can be used as the Equity Value because Market Cap is the combined value of a company's outstanding shares of stock.

(1.) Domino's Equity Value is $11.945 Billion

(2.) Papa John's Equity Value is $2.904 Billion

For the Debt Value we should use the Net Debt Value calculated in the previous blog post.

(1.) Domino's Adjusted Net Debt is $4.846 Billion

(2.) Papa John's Adjusted Net Debt is $0.362 Billion

In this instance, neither Domino's or Papa John's has any Preferred Stock, so the value here is 0.

Domino's Net Debt Value = $4.846 Billion
Domino's Equity Value = $11.945 Billion
Domino's Enterprise Value = $16.791 Billion

Papa John's Net Debt Value = $0.362 Billion
Papa John's Equity Value = $2.904 Billion
Papa John's Enterprise Value = $3.266 Billion

Calculating the Weighted Average Cost of Capital for Domino's and Papa John's

We calculated the Cost of Equity in the 1st blog post of this series and we calculated Cost of Debt in the 2nd blog post of this series. By taking a weighted average, we make sure the capital structure of the firm is taken into account when calculating the firm's Cost of Capital.

In the next and blog post we will forecast each pizza company's financial statements. We will be able to use these forecasted financial statements to estimate the firm's future free cash flow. Once we determine the future free cash flow, we can then discount by the WACC we just calculated. By discounting by the WACC, we can then tie back to each firm's valuation.

1st Post - https://peakd.com/hive-185582/@hurtlocker/calculating-the-cost-of-equity-for-dominos-and-papa-johns.

2nd Post - https://peakd.com/hive-185582/@hurtlocker/calculating-the-cost-of-debt-for-dominos-and-papa-johns.

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