FIN515 Second Course Project

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

Weighted Average Cost of Capital (WACC) is the combined rate at which a company repays borrowed capital and comes from debit financing and equity capital. WACC can be reduced by cutting debt financing costs, lowering equity costs, and capital restructuring. In order to minimize WACC, companies can issue bonds by lowering the interest rate they offer to investors as well as, cutting down

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

For this reason, new, or marginal, costs are used in its calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing then together. The capital components included in this calculation are a firms after-tax costs of debt, preferred stock, and common stock.

3) What is the weighted average cost of capital and why is it important to estimate it? Is the

A key factor in determining a project's viability is its cost of capital [WACC]. The estimation of Boeing's WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made. While finding a rate of return for an individual project, it is important to remember that WACC is only appropriate for an individual project.

The objective of this paper is to understand the process of calculation of weighted average cost of capital(WACC), which is the core multiple used for discounting future cash flows of an entity and calculating the intrinsic value of the company’s stock. However, in this paper, we will solely focus on the calculation of WACC and its component, the costs of equity and cost of debt. In order to work with a pragmatic approach, we have selected Henkel AG, a German conglomerate active in both consumer and industrial sector, and will estimate the WACC multiple of the said company. However, in order to be more comprehensive in our approach, we will bifurcate our calculation in two parts. While Part 1 will detail the cost of equity calculation and related assumption, Part 2 will discuss the cost of debt calculations and related assumptions.

After find out the results the next step will allow to compute for the taxes, and establish the WACC for the whole company. The discount rate represented by the weighted average cost of capital (WACC) has an important factor in deciding the net present value (NPV) of a project. Calculating the NPV is an important task since it allows the investors to make proper investment decisions. Given that the NPV of a project is positive, then the project is profitable and should be taken, but if the project has a negative NPV, then the project should be rejected. In the evaluations of a project the investors are making an investment decision with the objective of maximizing shareholders wealth.

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.

The divisional-based cost of capital would be calculated similar to the way PPC estimated its original WACC, except it should factor in each division separately first. First, an estimate would be made of the usual debt and equity proportions for each separate division. Next, the cost of debt and equity for each division would be calculated in accordance with the concepts followed by PPC. The factors of debt and equity costs and would be combined to determine the WACC, or minimum acceptable rate of return for the NPV of each individual division. Using separate divisional rates would reflect the risks inherent in each separate division of the corporation. This would also help create a better benchmark of each division with their respective industries.