Finance 100

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk. The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create returns greater than the industry cost of capital for each specific project.

While the relative debt and equity values can be easily determined, calculating the costs of debt and equity can be problematic. In calculating each component, we are given many different options and proxy values (boundless.com, 2015).  In addition the calculation is based on assumptions of the capital mix that cannot always be maintained, “One of main limitation of using WACC is that it does not take into consideration the floatation cost of raising the marginal capital for new projects. Another problem with WACC is that it is based on an impractical assumption of same capital mix which is very difficult to maintain” (Borad, 2012).

The weighted average cost of capital (WACC) is one of the most important figures in assessing a company’s financial health as it gives an insight into the cost of the financing, can be used as a hurdle rate for investment decisions, and acts as a measure to be minimized to find the best capital structure for the company (QFinance the Ultimate Financial Resource, 2011).   The WACC for the high-tech alternative is 9.056% and represents the rate of return that the investors of Guillermo Furniture require, weighted according to the proportion each element of debt and equity bear to the total pool of capital.   The Guillermo weighted mix of financing is 40% debt and 60% equity. This alternative produces a 12% return on equity, so with the WACC of 9.056%, it creates almost 3% additional value for its investors.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

To calculate the cost of debt and equity for this project, we combined the risk-free rate with a risk premium based on the market risk premium and the riskiness of Southwest Airlines.

At first, WACC and CAPM was attempted to be used as a source of cost of capital. However, for WACC, there is no available proportion of debt and cost of debt for MW. For CAPM, no available data seems to support the acceptable

The senior management of Company A employ you to advise them on the cost of capital the company should use to calculate net present value and decide whether or not to undertake a new investment project. You may assume that the new project is comparable to the average of the company’s existing projects in all respects.

The following case analysis portraits the use of capital asset pricing model to compute the weighted average cost of capital for Marriott and each of its divisions. The flow of events below is following a string of different evaluations, each of which is assessed separately.

All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk (1). Since Hansson believes the risk of the firm will increase, a higher WACC should be applied to the project

3) What is the weighted average cost of capital and why is it important to estimate it? Is the

The expectations of the weighted average cost of capital (WACC) varies when using market values of equity versus book value of equity because they are fundamentally different when attempting to analyze a business for investment endeavors. Book value and market value can determine if a stock or business venture is a practical one. Book value is simply the value of a business on its books or sometimes known as the accounting value. In comparison, the market value is determined by market investors and is the more meaningful value because it is the value placed on a stock despite what the book value is. These values can differ considerably and depends of various factors intrinsic to understanding overall value. Industry or sector type, financial strength or confidence of the business to generate profit plays a role in market value where these are not considered in the book value. For example, if the book value is greater than market value, investors will consider the value of the company is worth less in the financial market than what the book value states. In essence, the opportunity to gain stock in a business can be a valuable investment if the market perception is ultimately wrong. On the other hand, the dynamics of market value is often higher for stronger companies as earning power will inflate the market value than the actual book value. This connection is important to consider as a company’s market value can change on any given day versus the book value. There will be

In financial investing, beta is essential to measuring the risk of a particular stock or bond. All funds are based off of a universal beta of exactly one, meaning that the fund will move in unison with the market. A beta falling below one can insinuate that the asset at hand has a rate of variation lower than the market. Conversely, a fund with a beta above one will show a rate of volatility higher than that of the overall market. The Invesco account has a beta of 1.10. This value indicates that the fund has a tendency to fluctuate 10 percent more than the market. If the market falls, the fund will fall by 10 percent more, but if it rises the fund will increase by an additional 10 percent.

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.

The overall method used to calculate the expected value of the net present value of the project is to first calculate the real weighted average cost of capital of the firm, use the