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GE finance

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  • May 12, 2014
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  • School: ULV
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Discuss #2
BUS 530
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...
Discuss #2
BUS 530
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 on above, if IRR increases, the WACC will decrease. Compared with
WACC and ROIC, the IRR should be high enough. The reason is the WACC and
ROIC almost the same. The return of investment is not very substantial.
6. Finally, how does the WACC relate to the Capital Structure of your firm?
The WACC consist of the different component capital of the GE. First, the cost
of debt is 3.22%, which is acceptable to the investors. But the cost of equity is