Calculate WACC using book values:
The weight of debt is calculated by adding the current portion of long-term debt, notes payable and long-term debt, and dividing it by the sum of debt and equity. $5.4 + 855.3 + 435.9 = $1,296.6$1,296.6 / (1,296.6 + 3,494.5) = .27 = 27% The weight of equity is calculated by dividing the total shareholder equity by the sum of debt and equity. $3,494.5 / (1,296.6 + 3,494.5) = .73 = 73%

Cost of Debt
To find the cost of debt I subtracted the tax savings from the interest rate on debt. .045(1 - .38) = 2.8%

Cost of Equity
In order to find the cost of equity I used the CAPM approach. I used the yield on 20-year U.S. Treasuries as the risk-free rate, 5.74%. To estimate the market risk premium I used the arithmetic mean of 7.50%. I used Nike's average beta, 0.80. .0574 + (.075 - .0574).8 = 7.1%

WACC = KdWd(1 - T) + KeWe
WACC = (.028 x .27) + (.071 x .73) = 5.9%

Calculate WACC using market values:
The weight of debt is calculated by adding the current portion of long-term debt, notes payable and long-term debt, and dividing it by the sum of debt and equity. $5.4 + 855.3 + 435.9 = $1,296.6$1,296.6 / (1,296.6 + 11,427.43) = .10 = 10% The weight of equity is calculated by dividing the market value of equity (price per share x # shares outstanding) by the sum of the market value of debt and equity. $42.09 x 271.43 = $11,427.43$11,427.43 / (11,427.43 + 1,296.6) = .90 = 90%

Cost of Debt
In order to calculate the cost of debt I used the yield to maturity as the rate of return the existing bondholders expect to receive. To find the after tax cost of debt I multiplied the rate of return by the tax rate. .14(1 - .38) = .0868 = 8.7%

Cost of Equity
In order to find the cost of equity I used the CAPM approach. I used the yield on 20-year U.S. Treasuries as the risk-free rate, 5.74%. To estimate the market risk premium I used the arithmetic mean of 7.50%. I used Nike's average beta, 0.80. .0574 + (.075 - .0574).8 = 7.1%...

...WACC- Weighted average cost of capital, annual percentage cost of financing a project of average risk. The WACC is not a reflection of all projects and divisions only for specific projects.
Factors that affect WACC- Market conditions, firm’s capital structure, firm’s investment policy. Riskier policies= Higher WACC
Ways companies can raise common equity- Issue new shares of common stock, reinvest earning that are not paid out as dividends.
CAPM- Rs= Rrf+B(Rm-Rrf); Rrf+B(RPm)
DCF- Rs= D1/Po+G
Project risk= Stand alone risk, Corporate risk, and Market risk.
Steps in capital budgeting- Estimate cash flows, assess risk of cash flows, determine required return, evaluate cash flows.
NPV= CFo + (CF1/(1+r)^1) + (CF2/(1+r)^2) +….
IRR= internal rate of return on a project. MIRR= The % return on a project if the cash flows are reinvested at the cost of capital.
Mutually exclusive= if one project is taken then the other must be rejected.
Normal CF= initial cost of project followed by series of positive CF. Nonnormal CF= CFs of project switch back and forth from positive to negative.
Incremental CF- Sunk costs are irrelevant, Opportunity costs are relevant
Cannibalization- If a new product line were to decrease the sales of the firms other products. (Externality)
Always adjust for inflation when estimating cash flows. Risk in Capital Budgeting means an uncertainty in the projects future returns or CFs....

...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 debt nEquity
Weighted Average Cost of Capital is the weighted Average of the Marginal Costs of the Capital Components employed to acquire a long term asset (make a new real investment in things like Plant and Equipment, R&D, Human Capital, a new Product, a new Process, or a new Marketing Channel
Capital Components
Sources of funding that come from investors.
Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the cost of capital. We adjust for these items when calculating the cash flows of a project, but not when calculating the cost of capital.
WACC Estimates for Some Large U. S. Corporations
Company WACC Intel (INTC) 16.0 Dell Computer (DELL) 12.5 BellSouth (BLS) 10.3 Wal-Mart (WMT) 8.8 Walt Disney (DIS) 8.7 Coca-Cola (KO) 6.9 H.J. Heinz (HNZ) 6.5 Georgia-Pacific (GP) 5.9 wd 2.0% 9.1% 39.8% 33.3% 35.5% 33.8% 74.9% 69.9%
What factors influence a company’s WACC?
• Market conditions,...

... (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 risk influences the hurdle rate.
Larry Stone would need to estimate the firm’s hurdle rate because the firm would have to earn a minimum rate of return to cover all the costs generated from funds used to finance investment. The firm’s bonds and stocks would not be sold if the firm does not a minimum rate that covers their cost of generating funds.
When there are differences in the degree of risk between the firm and its divisions then it is not justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital.
We use the company's cost of capital to value new assets which have the same risk as the old ones. If the company is acquiring new assets whose risk is more or less than the risk of the existing assets then the capital required to finance(fund) the new assets will have a different cost of capital as investors demand a return based on the risk to their investment....

...CAPITAL (Et al) EXERCISES
1. Consider the following data regarding the cost of capital of an italian auto manufacturing firm:
* Capital structure includes 40% debt
* Industry average unlevered beta is 1.8
* 10 year Italian Government bond yield is 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 growth rate = 3%
* Tax rate = 35%
* Company is financed via 75% equity
* Industry average unlevered beta = 1.84
* Company’s debt is in the form of a syndicated loan that carries an interest rate of 4.5%
Please calculate the weighted average cost of capital (WACC) for this firm.
3. As an IE Business School graduate, you become the new CFO in the family owned firm. The company is struggling with liquidity, so you know you will need to use your best skills to get debt rolled over. Your elders (the Board) ask you to calculate the cost of equity with the following information:
a. Historically, shareholders have perceived a return of 4% over that of debt holders, to...

...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’ assets are financed by either equity or debt. The equity is the amount of fund that contributed by the shareholders. The debt is the amount of money that the company borrowed from banks. WACC is the average cost of growing the capital in the company. For example, if the company’s return is 16% and the WACC is 10%, then, the company makes 60 cents for each dollar invested into the capital. The weighted average cost of capital is a determination of how much the company should put for their investors and lenders. WACC is an important tool that used by both the investors to know how much their required rate of return is and by the firm to establish a target. The weighted average cost of capital is related to some other important tools such as the systematic risk, unsystematic risk and corporate valuation.
First is the corporate valuation. The corporate valuation is “Present value of expected future cash flows discounted at...

...Executive summary
AT&T is the largest communications holding company in the world by revenue. In 2008, the company continued to set the pace for industry growth. Revenues as well as per-share earnings increased during this period. The company strengthened its position in key consumer segments and returned value to stockholders through two means – stock buybacks and strong dividends. Highlights of the company’s 2008 financial performance include consolidated revenues that were up more than 4% over the previous year, reported EPS growth at 11.3% to $2.16 per share, return of $15.6 to shareholders through share buybacks and strong dividends. About 43.8% of the total capital of the company comes from debt and the remaining comes from equity. The cost of the different components of its capital structure are – debt: 2.92% (after-tax cost), and equity: 9.49%. The WACC is 6.61%, based on the capital structure outlined. The effective tax rate is 35.4%. AT&T has had dividend growth for the last 25 years. The dividend growth this year was 2.5% and the last year was 12.7%. Dividends declared totalled $1.61 per share in 2008, $1.465 per share in 2007 and $1.35 per share in 2006. The dividend policy considers both the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities.
Introduction
AT&T is the largest communications holding company in the world by revenue. It is also one of the largest companies...

...long-term debt is composed of eight long-term bonds. It also has two short-term bonds that mature this year and early next year. These bonds were neglected in this report. In this report the required return was calculated by using the coupon rates, market values, time until maturity, and tax rate. These values were all found on Microsoft’s 2012 financial statement. The weighted average cost of debt was then found through the multiplication of each bond’s required return and their corresponding bond weights. These bond weights were found through the multiplication of the quantity of bonds at each interest rate and the market value of each bond; this calculated value was then divided by the total amount of long-term debt, which gives the weights as a percent of the total debt. Microsoft’s total debt was calculated to be lkasdfjl;kasjdf, and the after-tax cost of debt was calculated to be asdfkl;safd. These are logical calculations, since the majority of Microsoft’s bonds do, in fact, have interest rates around 4%. Note, the interest on Microsoft’s bonds is incurred on a semi-annual basis and was calculated in this report on the same basis. Therefore, the semi-annual cost of debt would be half this value: 2%. Some other notes to consider in bond calculations are given below:
Do we have any other notes to consider guys? Feel free to message me, and I’ll add them, or...

...What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACCcalculation? 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 because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.
1.2 Analysis of Johanna Cohen’s calculation We analyzed the process of Johanna Cohen’s calculation, and found some flaws we believe caused computational mistakes.
i. When using the WACC method, the bookvalue of bond is available as the market value since bonds are not quite active in the market, but the bookvalue of equity isn’t. Instead of Johanna’s using equity’s bookvalue, we should multiply the current price of Nike’s stock price by the numbers of shares outstanding.
ii. When calculating the YTM of the firm’s bond, Johanna only used the interest expense of the year divided by the average debt balance, which fully...

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