The cost of company’s capital can be define of as the minimum return required by providers of finance for investing in an asset, whether that is a project, a business unit or an entire company. It is important to reflect the capital structure used to finance the investment. To create a capital companies usually use a funds providing by creditors and shareholders. Managers use cost of capital as the discount rate in net present value (NPV) project appraisal techniques.1 The weighted-average cost of capital (WACC) represents the overall cost of capital for a company, including the costs of equity and cost of debt, weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where:
Re = cost of equity ; Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
The higher the WACC, the less possible it is that the company is creating value, because it has to overcome more expensive borrowing cost in order to make a profit. In practice, WACC is often used internally by managers, as a part of determining, whether it would be profitable for the company to finance a new project. For external investors, as one way to value the company’s shares, and decide, is it worth to invest or not.

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1 Ian Cornelius, WACC attack, CIMA Insider, March 2002, p.22

...at 4.5%
* JP Morgan has issued an estimate for Expected Market Return at 8.5%
* Euribor is 2%
* Before tax cost of debt = 5%
* Tax rate = 30%
Please calculate the weighted average cost of capital (WACC) for this firm.
2. You are now asked to calculate the WACC for a toothpaste manufacturer with the following data:
* Average share price for last 6 months = €34/ share
* Current year’s dividend = €3/ share
* Applicable...

...What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets...

...CAPITAL BUDGETING
Cost of Capital Evaluating Cash Flows
Payback, discounted payback NPV IRR, MIRR
The Cost of Capital
• Cost of Capital Components
– Debt – Common Equity
• WACC
Should we focus on historical (embedded) costs or new (marginal) costs?
The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on marginal costs.
What types of long-term capital do organizations use?
nLong-term...

...1. Why do think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain.
(10% weighting)
Answer
The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold,2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same...

...The Cost of Capital Project: Internet Version {December 2009}
By
Wm R McDaniel, PhD
Objective
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting datum to estimate the discount rate to use in the net present value analysis of new projects or of termination decisions. The student will later need to know the...

...Chapter 12 – Determinants of Beta and WACC
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Ct is not known for certain. It is a random variable. It has a probability distribution with a mean and standard deviation.
Ct = E(Ct) = expected cash flow
“r” is the appropriate cost of capital. It should have the same riskiness as Ct
If Ct is a normal extension of the firm’s operations, and the firm is entirely equity financed, we use the stockholders’ required return as found through the CAPM for the appropriate...

...nominal tax rate of 48.69% for Dixon is assumed for Collinsville since company’s profits are taxed as a whole.
Tc = 3818 / (3818 + 4024) = 48.69%
Cost of Capital (WACC):
WACC = (65% * 19.57%) + (35% * 11.25% * (1 - 48.69%))
WACC = 14.74%
With the target leverage ratio at 35% and the tax shield at 49%, the resulting WACC for Collinsville is 14.74%....

...Executive Summary:
The purpose of this paper is to identify the weighted average cost of capital (WACC) in relation with the firm value. Also, there are some aspects discussed in the paper regarding when a firm should accept a project and when to reject. Systematic risk will be also discussed in the paper concerning their target market and how risky is that. Finally, the approach that BlackBerry took into consideration to overcome their risk.
Discussion:
All companies’...