What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC is the weighted average cost of capital. It can be calculated as: WACC = (Weight of funding source 1) x (Cost of funding source 1) + … + (Weight of funding source n) x (Cost of funding source n) Usually this will be simply: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity) It is important to estimate
Premium Weighted average cost of capital Dividend yield Time value of money
Abstract Ralph Lauren Corporation (NYSE:RL) is well known in the apparel clothing field. The corporation engages in the design‚ marketing and distribution of lifestyle product. This analysis paper will illustrate the current financial situation and forecast the future free cash flow based on the previous financial statement and financial data collected. These information and forecast are served for the potential investor to have a general understanding of RL Corporation and make the right choice
Premium Inventory Generally Accepted Accounting Principles Balance sheet
equity of 8%‚ a cost of debt of 5%. It stock is traded at $10/share‚ and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC? Equity Value = 10*10=$100 million‚ Debt Value=$20 million So‚ equity weight = 100/120=83.3%‚ debt weight=20/120=16.7% After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt =83.3%*8%+16.7%*5%*(1-40%) = 7.2% 4. Suppose you are the founder of a private company
Premium Bond Bonds Finance
recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation‚ we will use CAPM‚ the dividend discount model (DDM)‚ and the earnings capitalization model (ECM) to see the different in each and suggest the most suitable one. To sum it up‚ Ford is suggested to add Nike’s shares to its portfolio. Cohen’s Flaws According to the Cohen’s exhibits‚ there are 2 main flaws in her calculation of cost of capital and they are: 1. It’s correct that she used WACC since the
Premium Weighted average cost of capital Stock market Stock
Cost of Capital (WACC) • Capital structure components should be measured on a market value basis‚ not a book value or historic basis • Use a target capital structure rather than the current or historic capital structure • T always means the incremental tax-rate • Debt includes long-term debt‚ financing leases‚ short-term debt‚ operating leases used as permanent financing‚ off-balance financing transactions • If cash flows are real‚ first compute nominal WACC‚ then subtract inflation
Premium Net present value Finance Discounted cash flow
Sean Dougherty 12/10/12 Dr. Dominguez LTCS 50 Final Paper - Star Wars on Culture Friday‚ May 25‚ 1977‚ Memorial Day weekend opens with an intergalactic bang as the first of George Lucas’ blockbuster Star Wars movies hits American theaters‚ and the world was never the same. Whether you are a fan of the double trilogy or not‚ there is no doubt the series has permeated our society. Ranging from simple references in shows or movies to all kinds of memorabilia‚ Star Wars is an unavoidable phenomenon
Premium
final decision to proceed the plan. In this case‚ we cautiously made assumptions when estimating cost of debt‚ commercial-defense beta ratio‚ risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2. Capital Budgeting Decision Rule According to detailed free cash flow forecast for the 7E7 project from 2004 to 2037‚ Baseline estimated the Internal Required Return (IRR)
Premium Weighted average cost of capital Revenue Interest
their divisions. The divisions are Telecommunications Services and Products and Services. They use the hurdle rate based on the cost of capital which is a rough estimate of the Teletech’s WACC. They calculate it at 9.3% based on the cost of capital‚ beta‚ and WACC. 2. Please estimate the segments WACCs for Teletech (see worksheet Exhibit 1). As you do this‚ carefully note the points of judgment in the calculation. 3. Interpret Rick Phillips graph (Figure 2). How does the choice of constant
Premium Mathematics Weighted average cost of capital Investment
estimate? 2. Calculate Midland’s firm-wide WACC. Make sure you explain clearly your method and your choice of inputs. In particular‚ is Midland’s choice of market risk premium appropriate‚ and if not‚ what recommendations would you make and why? 3. Should Midland use a single corporate hurdle rate (i.e. a firm-wide WACC) for evaluating investment opportunities in all of its divisions? Why or why not? 4. Compute a separate estimate of the WACC for the E&P and R&M divisions. Again‚ make sure
Premium Finance Investment Weighted average cost of capital
FIN-516 – WEEK 2 - HOMEWORK ASSIGNMENT PROBLEM BASED ON CHAPTER 15 – WACC AND THE HAMADA FORMULA Bickley Engineering Company has a capital structure of 30% Debt and 70% Equity. Its current Beta is 1.3‚ and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley? Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The
Premium Weighted average cost of capital Finance Economics