Identify some of the factors that affect the overall‚ composite cost of capital. • Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. • List and briefly explain the three separate and distinct types of risk that can be identified‚ and explain the procedure many firms use when developing subjective risk-adjusted costs of capital.
Premium Weighted average cost of capital Corporate finance Stock
Sunday‚ March 15‚ 2009 COST OF CAPITAL AT AES Evaluating the Historical Capital Budgeting Method Currently AES employs Project Finance Framework. Project finance tends to be used in projects with tangible assets with predictable cash flows in which construction and operating targets can be easily established through explicit contract. The key to AES projects financing lies with the precise forecasting of cash flows. In effect‚ the possibility of estimating cash flows with an acceptable
Premium Finance Weighted average cost of capital Debt
2001 to 2003. Students also need to determine each company’s weighted-average cost of capital (WACC) to estimate EVA. The primary objective of this case is to introduce students to the concepts and calculation of WACC and EVA. Suggested Questions: 1. What is the weighted-average cost of capital (WACC) and why is it important to estimate it? Who determines the WACC? 2. Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be prepared to explain your assumptions for
Premium Mathematics Coca-Cola Value added
risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business‚ contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost of debt differ across three divisions? Why? ➢ What is/are suitable comparables? Why? ➢ What cause each divisional WACC differ? ➢ What
Premium Interest Investment
➢ Alternatively‚ EVA (Economic Value Added) = NOPAT – WACC (Invested Capital) can be applied to value the value of investment project. • Optimal Capital Structure ➢ Midland regularly reevaluated its debt levels and set long-term capital structure accordingly. ➢ Midland’s increasing borrowing capacity will shield additional profits from taxes. ➢ Midland’s target debt ratio is set based on each division’s annual operating cash flow and collateral value of its identifiable assets. ➢ Cost of
Premium Finance Weighted average cost of capital
debt in the capital structure for which it uses an interest coverage target instead of debt to equity ratio to determine the ideal amount of debt to hold. Problems: In order to calculate the WACC (hurdle rate) for each division‚ many different variables need to be analyzed in detail so that the WACC is a good evaluator of the profitability of future projects. A firm can only use its own cost of capital to evaluate projects when the firm is a single product or single division firm. For conglomerate
Premium Weighted average cost of capital
References: Emery‚ D. R.‚ Finnerty‚ J. D.‚ & Stowe‚ J. D. (2007). Corporate financial management (3rd ed.). Morristown‚ NJ: Wohl Publishing Inc. Ivestopedia. (2013). Weighted average cost of capital - WACC. Retrieved from http://www.investopedia.com/terms/w/wacc.asp Lloyd‚ J.‚ & Davis‚ L. E. (2007‚ November). Building long-term value. Journal of Accountancy‚ Retrieved from http://www.journalofaccountancy.com/Issues/2007/Nov/BuildingLongTermValue
Premium Weighted average cost of capital Finance
C 25% 700‚000 D 23% 400‚000 B 22% 200‚000 F 19% 600‚000 E 17% 500‚000 A 15% $400‚000 G 14% 500‚000 To estimate the firm`s weighted average cost of capital (WACC)‚ Kaka contacted a leading investment banking firm‚ which provided the financing cost data shown in the following table. Financing Cost Data Ace Products Company Long-term debt: The firm can raise $450
Premium Finance Stock Weighted average cost of capital
Starbuck’s Inc‚ Valuation Models Weighted Cost of Capital (WACC) The Weighted Average Cost for Capital is calculated using the following formula: WACC = wdkd(1-T) + was ks The variables for this formula are calculated as followas : wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt] The book value of debt is calculated by adding up the total of all the debt on the balance sheet. The market value of equity is the "Market Cap‚" and equals the number of (common)
Premium Stock Stock market
capital is a guideline for determining the optimum capital structure of a company. Weighted average cost of capital (WACC) WACC is the weighted average rate of return required by the suppliers of capital for the firm’s investment project. The suppliers of capital will demand a rate of return that compensates them for the proportional risk they bear by investing in the project. The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors‚ owners‚ and other
Premium Finance Weighted average cost of capital Investment