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7 Cards in this Set

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Marginal Cost of Capital Assumption:

-The balance sheet capital breakdown is the firm optimal capital structure.

-Fix long run condition to short run

Assumptions of the MCC:

1.We will take the projects in order based on the IRR.

2.If the project has IRR>WACC, managers will invest in the project.

3.HH will know about it and invest

4.We made the assumption that risks of projects are the same.

4.The projects have the same risk= average risk of the firm

*MCC=WACC (rd, rpfd, rs)


Example of 2 projects:

-Reparing piece of machinery that warned out

-Opening a steel plant in Venezuela

-These project's risk is not the same

We need some way to risk adjust projects:

2 methods:

1.Project Market Line

2.Risk buckets

Project Market Line:

Takes risk adjustment of projects into consideration

-->We will accept projects when IRR>WACC

Hurdle Rate Method:

The Method compares the MCC to the Investment Opportunity Schedule to determine which projects to accept or reject.

-You accept any project where the IRR>WACC

Second method:

Risk buckets:

-We put individual projects into risk buckets

-The team will then assign the required return for each risk bucket.