elements in calculating the cost of capital? How would an increase in debt affect it? How would you identify an organization’s optimal cost of capital? Is the cost of capital increasing or decreasing for most companies? DQ 2 What is meant by Weighted Average Cost of Capital (WACC)? What are the components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the impact on WACC when an organization needs to raise long term capital? DQ 3 What is an IPO? How does
Premium Weighted average cost of capital Time Weighted mean
Weighted Average Cost of Capital (WACC) Calculations The weighted average cost of capital (WACC) is the discount rate used in the discounted cash flow analysis. Usually‚ the WACC is the weighted average of the cost of debt (Kd) and the cost of equity (Ke)‚ since debt and equity are the most common sources of funds for the companies. In general‚ the formula for WACC is the following: As implied by the formula itself‚ if a company does not have interest-bearing debts‚ then its WACC would equal
Premium Weighted average cost of capital Discounted cash flow Capital structure
What are main elements in calculating the cost of capital? How does an increase in debt affect it? How do you identify an organization’s optimal cost of capital? • The main elements in calculating the cost of capital are cost of debt‚ cost of equity‚ preferred stock and common stock. • An increase in debt indicates a higher risk which can increase the required rate of return which raises the cost of capital. Higher debt can also accrue additional costs. • By mixing the permanent sources of funds
Premium Finance Economics Investment
Question 1 Reliable Gearing currently is all-equity financed. It has 10‚000 shares of equity outstanding‚ selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200‚000 with the proceeds used to buy back stock. The high debt plan would exchange $400‚000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. a. What will be the debt-to-equity ratio after each possible restructuring? b. If earnings
Premium Finance Weighted average cost of capital Stock
debate within the firm’s circle of senior managers in recent months. A number of issues had been raised about the hurdle rate used by the company when evaluating performance and setting the firm’s annual capital budget. As the company was expected to invest nearly $2 billion in capital projects in the coming year‚ gaining closure and consensus on those issues had become an important priority for Weston. Now‚ Yossarian’s letter lent urgency to the discussion. In the short run‚ Weston needed to
Premium Weighted average cost of capital Investment Net present value
Executive Summary: The purpose of this paper is to identify the weighted average cost of capital (WACC) in relation with the firm value. Also‚ there are some aspects discussed in the paper regarding when a firm should accept a project and when to reject. Systematic risk will be also discussed in the paper concerning their target market and how risky is that. Finally‚ the approach that BlackBerry took into consideration to overcome their risk. Discussion: All companies’ assets are financed by
Premium Net present value Investment Cash flow
identify high risk‚ average risk and low risk projects. What hurdle rates would be assigned to each division? In order to calculate the divisional hurdle rates for each division‚ first the cost of capital (KS) had to be examined with the CAPM formula. Following‚ the observed KS can be plugged into the WACC formula in order to find the divisional hurdle rate for average risk. Because of the given debt-structure of 45% the cost of debt has to be multiplied by 0.45. The given cost of debt is 11%
Premium Finance Weighted average cost of capital Management
analysis of this company cost of capital and multiple valuation techniques as a reduction of Guillermo financial risks. With these evaluations there will be a determination of the present value net as well as base of its expected future net cash flows. This determination will be made by a variety of financial concepts that will be determined by gathering Guillermo present value of net to improve the company’s future cash flow. A brief description of the company cost of capital that is the required return
Premium Discounted cash flow Variable cost Costs
of debt in the capital structure. The company determined the optimal amount of debt based on its ability to service the debt. As of 1987‚ Marriott had $2.5 billion debt which accounted for 59% of its capital. Lastly‚ Marriott repurchased undervalued shares. On regular bases‚ Marriott calculated a “warranted equity value” of its common shares and purchased the stocks that fell below the value. Marriott believed the repurchases of those shares were better uses of the company capital than acquisitions
Premium Weighted average cost of capital Debt Net present value
a. Discuss the specific items of capital that should be included in the WACC. The WACC calculation should include all the sources of capital like common stock‚ preferred stock‚ bonds and any other long-term debt. b. The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure. (In Millions)
Premium Weighted average cost of capital Corporate finance Finance