Running head: CROCS SEMESTER PROJECT 1

Crocs, Inc. – Deliverable 2

 
WACC
WACC, which stands for the weighted average cost of capital, represents a firm’s
average cost of capital from all sources. A firms WACC is likely to be higher if its stock is
relatively volatile or if its debt is seen as risky because investors will demand greater returns.
For Crocs, we calculated the WACC by finding the cost of equity, which was 0.38% and the
CROCS SEMESTER PROJECT 2

cost of debt which was 19.62%. From the Financials, we picked income before expense
which had a value of $65,157 and the income tax expense figure, which was $14,720, to find
the after-tax cost of debt by dividing the income tax by the income before income taxes.
After this, we got a value of 22.59% and used it to calculate the after-tax of cost debt by
multiplying the cost of debt by one minus the effective tax rate, which gave us a value of
15.19%. In calculating the WACC, we used CAPM, and the formula was
E/V*ke+D/V*kdt(E-equity value, V-total capital D-Debt value). In calculating E, we
multiplied the shares outstanding by the share price and got $4,323,540,000. For the D, we
got it from the expense sheet and had a value of 226,849$, and for V, we added E+D, which
was equal to $4,323,766,849. After this, we divided E by V to get E/V which was 99.99%
and D by V to get D/V which was 0.01%. In the end, we got the WACC for Crocs to be
0.39%. This means the company must pay investors an average of $0.039 in return for every
$1 in extra funding.

Cost of Capital 
Cost of capital is the equity return that a company requires for an investment or
project. 
The formula used to calculate the cost of equity is either the dividend capitalization model or
the CAPM (Capital Asset Pricing Model). For Crocs Company Ltd., we used the CAPM
formula. Our risk-free rate was 0.10% on the December 2019 annual bill rate, and this is the
rate of return we would get on an investment with zero risk. An increase in this figure would
cause the market risk premium (Rm) to increase and vice versa. This reason is attributed to
investors getting a higher risk-free return, so riskier assets will need to perform better than
before to meet investors’ new standards for required returns. The market risk premium (Rm)
we calculated was 43.64%. We obtained this figure by subtracting the current year figures for
Nasdaq-CI from the previous year and dividing the product by the exact figure. This was the
December 2019 annual market return. For our beta, it was 0.007, which shows the systematic
risk measurement. 0.07 % of the volatility of returns of the market average and the stock
prices movements will be rather extremes. The historical returns were used for the beta
calculations.
Firm Valuation
CROCS SEMESTER PROJECT 3

We used the Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity to find
the firm’s value. The FCFF is a measure of how profitable a company is after accounting for
depreciation, taxes, working capital, other expenses, and reinvestments. To calculate our
FCFF, we found the sum of net income, non-cash charges and after-tax charges and
subtracted the fixed capital investments from this total sum. The present value was then
located on each year’s projection at a rate of 0.39%. For the first two years, the cash flows
were negative (($222,476.92 & ($277,462.91) for 2021 and 2022 respectively), meaning that
Crocs have not generated enough revenue to cover its expenses and investment activities for
those years. From 2023 however, the cash flows became positive, which means they have
cash remaining after their expenses. We calculated the terminal value using the perpetuity
method to find the firm value. After finding the terminal value, we found the present value
and added it to the sum of our cash flows to arrive at a firm value of $441,994.54.
The FCFE measures how much cash is available to equity shareholders after paying
all expenses, debt, and reinvestments. Our FCFE was calculated by subtracting after-tax
interest from our FCFF and adding net borrowings. Just like our FCFF, the first two yearly
values were negative (($250,552.81) & ($109,313.43) for 2021 and 2022 respectively), but
the following years all returned positive values. Since Crocs do not pay dividends, their
funding comes from either debt or existing capital within the firm. To calculate the share
value, we had to find the FCFE per share and discount them. Our FCFE per share was found
by dividing each FCFE value by the shares outstanding for Crocs. After discounting each
value, we multiplied each cash flow and the discounted value to arrive at the present values.
The share value then became the sum of each present value over the five-year period. A
value of the share of 0.023 represents how much money stakeholders would receive if the
firm were to be liquidated.

Net Asset Value (NAV)

Earnings Capitalization 
Capitalization of earnings is a method of determining the value of an organization by
calculating the worth of its anticipated profits based on current earnings and expected future
performance. The capitalization rate we got was 76% by adding the growth rate to the cost of
equity. The growth rate is Return on equity by the beta. The Return on Equity was recorded
as 108%. Using the dividend policy, we obtained a figure of 0.30 for the earnings payout
ratio. The profit retention ratio was one subtracted from the earrings payout. The value per
share of equity for Crocs is 0.01. This figure represents the minimum value of a company’s
equity and measures the book value of a firm on a per-share basis.
Since the value is under 1, it is considered an excellent P/B value, indicating a potentially
undervalued stock. However, value investors often think of stocks with a P/B value under
3.0.