Essay on Finance 100 - Hydrotech Case Study

Risk free rate is taken to be 4.69% while the market risk premium is 5.01%.

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?

debt-to-equity ratio to find a cost of equity of 17.12%. Next, we apply the CAPM using the 10-year Treasury for

When using the CAPM for assessing the risk of one project, it is important to determine both equity betas (also known as the geared betas) and asset betas. The asset betas in fact represent to total systematic risk of one company. The formula for the asset beta is defined as follows:

This will be the capital structure weight for the WACC. Thus, debt percentage is 34.4% and equity is 65.6%.

The Weighted Average Cost of Capital (WACC) is the rate at which the firm is expected to pay for capital raised by issuing debt and equity to finance its assets. It is the minimum return that the company should earn to satisfy the needs of the debt holders and shareholders of the company. It is calculated by proportionally weighing each category of capital such as common stock, preferred stock, long term and short term debts, bonds etc. It is the discount rate used to calculate the present value of the future cash flows when the risk pertaining to that particular cash-generating unit is similar to that of the overall firm

All companies’ assets are financed by either equity or debt. The equity is the amount of fund that contributed by the shareholders. The debt is the amount of money that the company borrowed from banks. WACC is the average cost of growing the capital in the company. For example, if the

The weighted average of the firm’s costs of equity, preferred stock, and after tax debt is

The Weight Average Cost of Capital (WACC) is the firm’s cost of capital. We can think of WACC as an average representing the expected return on all of the companies’ securities. It is an extremely important number for both corporations and usually financials advisors. Corporations use this number as a minimum for evaluating their capital projects or investments. So if for example the WACC of a firm is 10% and the return on investing in a project is 4.5%, then the company would not invest in that particular project. The company in this particular scenario would at least have to get a return of 10% or more to invest in a project. I agree with Johanna Cohen’s estimates as she did the calculations right because I went over

There are two main sources that a firm can use to raise capital are equity and debt. Weighted average cost of capital is the average of the costs of these two sources of finance, and it gives each one the appropriate weighting. When a firm takes a new project, it usually

The WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond, the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market, a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market. A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I will be

Calculating a firm’s cost of capital is highly important in capital budgeting as capital costs are used to determine investment opportunities, which in turn determines the profitability of the firm. This is true even if a firm knows that a particular project will be financed in a particular way. For example, with debt, the firm must use the concept of Weighted Average Cost of Capital to evaluate all of their capital investment projects. 1 The target capital structure, which determines the cost of capital, must be applied to each investment opportunity because if all the cheap (i.e. debt) capital is used for one project, only the expensive (i.e. equity) capital will be available for future consideration. A later project could be considered unprofitable if evaluated with the cost of equity, but profitable if evaluated with the Weighted Average Cost of Capital (WACC). This can become confusing for the person evaluating the projects, but there is an easier solution. The optimal capital budget results only when each investment opportunity is evaluated with the WACC. Each dollar in the capital budget is considered part debt, part preferred stock and part common equity. Of course, the equity will come from either current retained earnings or the sale of new common stock.