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.
1. Why is Lex Service PLC concerned about its cost of capital in 1993? What role will an estimate of the cost of capital play within Lex? In general, how can and do companies make use of cost of capital estimates?
WACC is the weighted average cost of capital and provides firms with the idea of the proportion of debt
How does Marriott use its estimate of its cost of capital? Does this make sense?
*We calculated the cash flows of the firm and discounted them by our WACC, which was roughly 16%. We used a terminal growth rate of 6% (Exhibit 1)
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.
1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.
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%.
b. How did you measure the cost of debt for each division? Should the debt cost differe across divisions? Why?
Moving forward, we must calculate the cost of debt. The cost of debt is the rate that a company pays on its current liability. This can be calculated before or after tax. For the purpose of this paper, the cost of debt will be determined by the type of long term rating the company has. According to Moody’s (n.d.), Molson Coors’ is Baa2 (as shown in the chart below) as of April 26, 2012.
1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.
Cost of Debt = (1-Ʈ) rd, where rd is the rate for pretax cost of debt and (1-Ʈ) represent the tax shield.
3) What is the weighted average cost of capital and why is it important to estimate it? Is the
The cost of debt (kd) rate of 13% was used after we assessed the key industrial financial ratios and compared them with that of Wrigley’s (See Appendix 2) to conclude that it was in the range between the BB rate of
The cost of debt for each division is the government interest rate plus rate premium: lodging: 8.72%+1.1%=9.82%（long-term), contract Services: 6.9%+1.4% =8.3%(short-term) and restaurant: 6.9%+ 1.8%=8.7% (short-term).