Estimate critical analysis of the companys recent history with Essay

Estimate critical analysis of the companys recent history with Financial Analysis of Heartland Express company - Essay Example (Rm-Rf) is the risk premium rate and beta can be defined as a measure of how much the stock and market move together. The following values have been traced through relevant financial sources WACC or the weighted average cost of capital is the weighted average cost of the company’s equity and long term debt. WACC is calculated by multiplying the cost of equity with the market value of the equity and cost of debt with the market value of the debt. Cost of debt is usually the interest rate that the company’s pay on its long term and short term financial borrowings. However, an analysis of the company’s financial statements will show that the company does have any long term or short term interest bearing financial debts. All of its debts comprise of trading nature and the company does have to pay any interest on such securities. Does the cost of debt for the heartland express is nil. Keeping all the above factors into consideration, the WACC of heartland express is equal to its cost of equity i.e. 6.11% The estimated value of the company’s equity is calculated by discounting the free cash flow of the company for the foreseeable future using the weighted average cost of capital of the company (WACC). Free cash flow method is basically a measure of financial performance of the company which is calculated as free cash flows minus the capital expenditure. From pure financial management’s perspective, free cash flow can be defined as the cash which the company is able to generate setting aside the money required to maintain or expand its current asset base. The following table presents the free cash flow calculation and the equity value of the company as at financial year end December 31, 2010. Note 2: In the free cash flow method, the depreciation and amortization expense are added to the profit after taxes since these are the non-cash items. For the