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Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

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.

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

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.

Project as outlined in proposal consists of 22 hours of work at $40 per hour (Non-profit rate). Normal rate is $45 per hour.

You seem to recall that Dynamic’s Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects. You are fairly sure it is 10%.

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.

WACC = (1-corporate tax rate)(Pretax rate of cost of debt)(Market value of debt/ D+E))+ After tax rate of cost of equity(market value of equity/D+E))

WACC calculations entailed several different steps prior to using the actual WACC formula. First, by using CPP’s balance sheet we identified its D/E, by dividing Debt portion by the Equity portion arriving at 2.07, than we calculated D/V – 0.67 and E/V – 0.33. Afterwards, we used comparable firm Wackenhut’s capital structure for our analysis and applied it to our calculations. Wackenhut’s capital structure consisted of 92% equity and 8% debt. Subsequently, we went through the Beta unlevering and then levering process using above capital structure. To unlever, we multiplied given beta of 0.89 by the debt portion of capital structure 0.92, than we relevered the Beta_e=(1+D/E 2.07) * unlevered Beta 0.82 = 2.51. Next step consisted of calculating R_e=R_f+beta_e*MRP= 8.6%(given)+2.51*7.5% (given)=27.41%.

Despite this change in price, the Weighted Average Cost of Capital (WACC) will give a more accurate representation of what the change in capital structure implies for the firm, by taking account the costs of debt.

1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.

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

One of the two major component of WACC is the cost of equity. The cost of equity model takes into account three values which we must calculate - a risk-free rate (rf), risk premium rate (expected market return - rf), and Beta Value.

To find the WACC, the cost of each of the capital components mentioned above as debt, preferred stock and common equity are calculated