Zhe SHI 11528005
1. What is the WACC of the company?
On the September 24, 2013, the WACC of General electric company is 6.64%.
2. What does WACC represent to the firm?
The WACC is a way to calculate the cost of different parts of capital in which each category of capital is proportionately weighted. The function of WACC is telling the CEO a project deserves to invest or not. The WACC of GE is 6.64% which is means if ROIC of a new project is higher than 6.64%, the GE will consider about to invest it. The ROIC is just 7% only a little high than the WACC(6.64%). The GE faced a dilemma.
3. How does Beta influence the WACC?
Beta is a number to tell the investor the risk level to invest this company in stock market. If the beta higher than 1, which is means the risk to invest this company higher than the average risk level of market, the investor would face a high risk. So, the beta will affect the cost of common stock and preferred stock. And the cost of stock is an important component of capital. We could the find the beta is a reason to make the WACC high. For example, the beta of GE is 1.24,and the WACC is 6.64%
4. How does the Risk Free Rate influence the WACC?
According to the capital asset pricing model, the CAPM= risk free rate+ (market return-risk free return)beta. By using this formula, the beta of GE is 1.24; keep the market return invariant, if the risk free rate increase, the CAPM will also increase. So the WACC should increase too.
5. How does the WACC for a firm and the IRR of a project within the company correlate to each other? The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. This means if the IRR increases, the net cash flow of the company will also increase. And the net cash flow could reflect the capital of the company input, which means the more net cash flow the company got, the lower capital of the company input. Based...
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