The weighted average cost of capital, commonly referred to as WACC, is an important and widely accepted tool for companies to use. WACC allows the company to value future projects and the company as a whole by proportionately weighing each category of capital; because of this a firm’s WACC is dependent on the capital structure of the firm. Investors also use this tool to confirm whether or not companies are worth the investment risk. The higher the WACC, the higher the investment risk of a company. This is due to an increase on the rate of return on equity and beta. Companies use WACC to evaluate new projects. By discounting potential investments by the WACC, we can determine if the potential project or investment will have a high enough return to satisfy the various investors. The asset beta method is another widely used tool for valuing the future projects as well as the company as a whole. The asset beta method is a version of using the widely accepted CAPM (capital asset pricing model), substituting in asset beta for the firm’s beta. By using asset beta, financial effects from leverage are eliminated. As a result, using equity beta removes any beneficial effects gained from adding debt to the capital structure, giving investors a better idea of how much risk they are actually taking on when investing. The first step in calculating the WACC is to determine the total value of the company by adding together total equity, total preferred stock and total debt. The total…
Finding Marriott’s WACC To calculate the WACC we need to identify the different factors included in the WACC-method, to be able to measure the opportunity cost for investments. First we need to identify the debt, equity and the firm value, which is equity plus debt. Then we identify the debt cost (rD), which is a pre-tax cost, and then we need to identify the cost of equity (rE). As we can observe in table A, the debt percentage in capital is 60 %, which implies that the equity is 40 %. By…
discounted cash flow forecast developed. As she was still unsure of her findings she had her assistant, Joanna Cohen, estimate Nike’s cost of capital. Cohen used WACC, weighted average cost of capital for the estimate of 8.3. WACC is the weighted average cost of capital. Its calculations consist of a firm’s cost of capital in which each category of capital is proportionately weighted; common stock, preferred stock, bonds and any other long-term debt. A firm’s WACC increases as the beta and the…
company varies greatly depending on the comparable companies. If Masco (which is the largest comparable company) is included, the value goes to nearly $3.7 B and excluding it causes the value to go down to $1.2 B. Moreover, depending of the discount for lack of liquidity and control, the value of the company could decrease considerably. Then, in the market approach there are two variables that affect the value of the company; comparable peers and the discount for lack of liquidity and control. …
weighted average cost of capital (WACC) and provide the equation when long-term debt and common equity are used to obtain capital funds? Please describe each component and how you measure each? Please briefly describe divisional WACC’s of a firm. How do you use WACC for each division when making investment decisions? How does a higher beta affect WACC and why? How does a drop in the bond market effect WACC and why? WACC is weighted average cost of capital. It is expected rate of return on…
Executive Summary: Midland Energy Resources, Inc. is a global energy company with a broad array of products and services. The company operates within three different operations including oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals. Midland has proven to be a very profitable company, with reported operating revenue of $248.5 billion and operating income of $42.2 billion. The company has been in business for over 120 years and employed more than…
October 9th. We then got the dividend next period from the Value Line Stock Report that was pulled on October 9th, the estimated dividend growth rate was also taken from the stock report. The last method calculate was the yield of outstanding long-term bond and we take the cost of debt which was calculated before and added the premium over bond which was given. After doing so you take the average of the three for the best cost of common stock. After all the above is identified and determined we…
average cost of capital (WACC) of 8.3 percent by using the capital asset pricing model (CAPM) for Nike Inc. The problem with Cohen’s calculations is that she used the book value for both debt and equity. While the book value of debt is accepted as an estimate of market value, book value of equity should not be used when calculating cost of capital. The market value of equity is found by multiplying the stock price of Nike Inc. by the number of shares outstanding. Market Value of Equity E= Stock…
this report used two-stage discounted cash flow (DCF) model. This model is chosen considering that Graincorp is in the mature stage, with the characteristics of paying high dividends and has a high leverage. Moreover, management stated that they are building another silos by this year, so it is assumed that Graincorp will have an increasing growth for several periods and will drop to the stable growth afterwards. Hence, the first stage of this model would be the increasing phase for 5 years and…
is the possibility that book values are backward-looking and ignore important economic considerations, such as the value of brands, intellectual property, and customer franchise as well as the debt tax shields. In contrast, finance theory and best practice rely on the firm’s current market value as a guide to compute the capital weights. Before the recapitalization, Wrigley’s market value of equity accounted for 99% of its capital. And, after the recapitalization, that ratio fell to 78%. The…