Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Anheuser-Bush InBev sustains in the last years a fixed level of debt of D=$110B, which is regarded to be risk-free.
Moreover, the market value of its shareholders’ equity is E=$70B and the beta of its stock βE=1.4. Suppose that the CAPM holds. The risk-free rate is 2% and the market risk premium is 5%.
The company plans to introduce a new ultra-light beer with zero calories, which will be called BudZero. The cost of bringing the beer to the market (at t=0) is $200M.
BudZero is then expected to generate constant
Suppose that the “BudZero” project will be financed exclusively with equity.
What is the
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