The Weighted Average Cost of Capital. Cash Flow Standard measure of cash flow: (Rev – OpCost)(1-t c ) + t c Dep -  NWC – Capex OCF Ignore for now.

Slides:



Advertisements
Similar presentations
Chapter 13 Learning Objectives
Advertisements

McGraw-Hill/Irwin Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts & Skills Calculate & explain A firm’s cost of common equity capital A firm’s cost of preferred stock A firm’s cost of debt A firm’s overall.
Chapter Outline The Cost of Capital: Introduction The Cost of Equity
CHAPTER 13 The Cost of Capital
Factor Model.
Cost of Capital Problems
Chapter Outline The Cost of Capital: Introduction The Cost of Equity
Risk, Return and Capital Budgeting For 9.220, Term 1, 2002/03 02_Lecture15.ppt Student Version.
Estimating Hurdle Rates. Cost of Capital To evaluate project, need estimates of cashflows, and also estimate of an appropriate hurdle rate (r). Hurdle.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fourteen.
15-0 Chapter 15: Outline The Cost of Capital: Some Preliminaries The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of.
Motivation What is capital budgeting?
Instructor: Williams. Weighted Average Cost of Capital Also abbreviated “WACC” Don’t get thrown by the jargon! Remember! Cost of Debt Capital = Required.
Calculating the Cost of Capital MGT 4850 Spring 2008 University of Lethbridge.
Chapter 11 Weighted Average Cost of Capital  The Cost of Capital  Components of the Cost of Capital  Weighting the Components  Adjusting the Debt Component.
1 COST OF CAPITAL WEIGHTED AVG COST OF CAPITAL (WACC) r = w d r d + w e r e w d = proportion of assets funded by debt r d = After-tax cost of debt w e.
Chapter 10 – The Cost of Capital
Why Cost of Capital Is Important
Weighted Average Cost of Capital
Cost of Equity Capital Calculation Methods Market determined standard Comparable earnings standard.
Weighted Average Cost of Capital (WACC) Module 6.2 Copyright © 2013 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
FIN 614: Financial Management Larry Schrenk, Instructor.
Cost of Capital and Efficient Capital Markets. Why Cost of Capital Is Important Cost of capital provides us with an indication of how the market views.
Chapter 12 Cost of Capital 0. Why Cost of Capital is Important Return is commensurate with Risk – always (SML) The cost of capital gives an indication.
Chapter 14 Cost of Capital 14.1The Cost of Capital: Some Preliminaries 14.2The Cost of Equity 14.3The Costs of Debt and Preferred Stock 14.4The Weighted.
Risk, Cost of Capital, and Capital Budgeting. Valuing a Project When valuing a project you need two things: Initially you were given both (Unit.
1 Calculating the Cost of Capital Three steps to calculate it: 1.Find the required rate of return on each kind of security the firm has issued 2.Find the.
© 2003 The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital Chapter Fourteen Prepared by Anne Inglis, Ryerson University.
Cost of Capital Chapter 14. Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt.
© 2004 by Nelson, a division of Thomson Canada Limited Contemporary Financial Management Chapter 8: The Cost of Capital.
Chapter 3 Cost of Capital
FIN 614: Financial Management Larry Schrenk, Instructor.
Cost of Capital Professor Ronald Miolla. Agenda 1) What is Cost of Capital? 2) How to compute Cost of Capital. 3) Cost of debt. 4) Cost of equity.
COST OF CAPITAL Chapter 7. Chapter Outline The Cost of Capital: Introduction The Cost of Equity (CAPM and DDM) The Costs of Debt and Preferred Stock The.
Chapter 10 Questions and Answers Q1. Pennsylvania Clean Coal Company (“PCCC”) generates electricity for both industrial customers as well as consumer households.
12.0 Chapter 12 Cost of Capital Issues in Chapter 12 What is cost of capital? Why is cost of capital important? Know how to determine a firm’s cost.
Business Finance (MGT 232)
Exercises in Capital Structure and Cost of Capital
Li CHAPTER 10 The Cost of Capital Sources of capital Component costs WACC Adjusting for risk.
Cost of Capital FWhat is the appropriate discount rate? FCapital Structure involves the use of: F FOptimal Capital Structure:
9-1 CHAPTER 11 The Cost of Capital Sources of capital Component costs WACC.
15-1 Chapter 15 Required Returns and the Cost of Capital © Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e Created by: Gregory.
Costs of Capital Weighted Average Cost of Capital (WACC)
Ch 14 Cost of Capital. In this chapter, the important fact to note is that the return an investor in a security receives is the cost of that security.
1 資金成本 Cost of Capital. 2 Weighted average cost of capital (WACC). The discount rate used in the capital budgeting 1. Identify the components to be used.
TOPIC: WEIGHTED AVERAGE COST OF CAPITAL (WACC) Firm Value should be Maximized when WACC is Minimized Factors that impact on WACC include operating profitability,
Financial Management FIN300 Cost of Capital. Objectives Upon completion of this lesson, you will be able to: –Determine a firm’s cost of equity capital.
Chapter 12 Cost of Capital!. Key Concepts and Skills Know how to determine a firm’s cost of equity capital Know how to determine a firm’s cost of debt.
Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 15 Cost of Capital.
Chapter 14 Cost of Capital McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cost of Capital Cost of Capital - The return the firm’s.
3- 1 Outline 3: Risk, Return, and Cost of Capital 3.1 Rates of Return 3.2 Measuring Risk 3.3 Risk & Diversification 3.4 Measuring Market Risk 3.5 Portfolio.
Lecture 11 WACC, K p & Valuation Methods Investment Analysis.
Why Cost of Capital? – Overall Cost of Capital of the Firm – Investment Proposal- Accept /Reject – Capital Structure – Yardstick to measure the worth of.
CHAPTER 9: THE COST OF CAPITAL. The Cost of Capital: 2.
DES Chapter 4 1 DES Chapter 4 Estimating the Value of ACME.
BUSINESS VALUATION MODELS Two methods: 1. Discounted Cash Flow 2. Relative Values.
Estimating the Value of ACME 1. Steps in a valuation Estimate cost of capital (WACC) – Debt – Equity Project financial statements and FCF Calculate horizon.
Chapter 12 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.
Cost of debt = Interest Payments. Debts are the borrowing which company takes to finance the company therefore they have to pay interest on those borrowing.
14-0 The Weighted Average Cost of Capital 14.4 We can use the individual costs of capital that we have computed to get our “average” cost of capital for.
Cost of Capital Chapter Fourteen. Prof. Oh, KUMBA 2010Ch14-1 Corporate Finance Key Concepts and Skills  Know how to determine a firm’s cost of equity.
BUS 401 Week 4 Quiz Check this A+ tutorial guideline at NEW/BUS-401-Week-4-Quiz 1.) Investors will make an investment.
Estimating the Value of ACME
Chapter 13 Learning Objectives
Finance Review Byers.
Estimating the Value of ACME
Questions-Cost of Capital
THE COST OF CAPITAL FOR FOREIGN INVESTMENTS
Presentation transcript:

The Weighted Average Cost of Capital

Cash Flow Standard measure of cash flow: (Rev – OpCost)(1-t c ) + t c Dep -  NWC – Capex OCF Ignore for now

Equity Cash Flow Alternatively, cash flow to equityholders = (Rev – OpCost – R B B)(1-t c ) + t c Dep = (Rev – OpCost)(1-t c ) + t c Dep – R B B(1-t c ) = OCF – R B (1-t c )B

Equity Market Value Mkt Value Bal. Sheet B A __SV To calculate value of S: Discount cash flow to equityholders at cost of equity, R S

Calculating Market Value

Calculating Market Value (cont.) Conclusion: To estimate total market value, discount OCF at weighted ave. cost of capital

Weighted Ave. Cost of Capital (WACC) Use market value weights Use after-tax cost of debt Discount OCF (financing mix is captured in the discount rate)

Estimating Cost of Debt Use current bond yield, not the coupon rate on already outstanding debt We are trying to estimate the required return on newly-issued securities

Estimating Cost of Equity Two possibilities for estimating R S –Capital Asset Pricing Model (CAPM) –Dividend Discount Model (DDM)

Potential Pitfalls CAPM: –Beta should reflect business risk and financing characteristics of project (not the firm that undertakes it) –What debt ratio can the project support? DDM: –Watch out for growth rate estimate

Determining Project Cost of Capital Stand –alone principle: value projects as if they were separate subsidiaries with their own capital structures –What does the project contribute to company’s systematic risk? Business risk Financial risk –What does the project contribute to company’s debt capacity?

Inappropriate Use of Firm WACC When Project Risks Differ (Fig. 12.7) Expected Return SML B RWACC = 15% A R F = 7% Beta Firm Beta

Feedback: Privacy Policy Feedback
Do Not Sell My Personal Information
About project: SlidePlayer Terms of Service

© 2025 SlidePlayer.com. Inc. All rights reserved.