Urban Outfitters Essay

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Executive Summary: Urban Outfitters operates specialty apparel, accessories and home goods retail stores under the brand names of Urban Outfitters, Anthropologie, Free People, Terrain, Leifsdottir and BHLDN. It also 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 ticker URBN1. In this report we evaluate a capital budgeting project which the company wishes to undertake. We first calculate the WACC for the company by looking at the capital structure of the company. We then calculate the cash flows of the project and use the WACC as the discounting rate. In order to make the project acceptance/rejection decision, we calculate the payback period, net present value, and internal rate of return, 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 estimate the capital structure weights based on the market values. From the balance sheet of the company, we find that Urban uses only common equity for its long term capital needs. It has a line of credit 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 – Under CAPM, cost of equity is calculated as Cost of equity = Rf + (Rm-Rf) beta where Rf = risk free rate which is taken as the long term rate to match the maturity of the project. Since the project is 8 years, we take the 10 year Treasury bond rate as the risk free rate. The current 10 year Treasury bond rate is 2.32% (Rm -Rf) is the market risk premium and is assumed to be 5.5% Beta

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