Introduction and objectives
This paper aims at describing a way to compute the Weighted Average Cost of Capital (WACC). This method is often used by company management to determine the economic feasibility of different projects and thus to compute the NPV of a specific project by discounting cash-flows. The WACC determines the return that the company should generate to satisfy its debt-holders. For the company, it consists in a tool for projects decision-making, whereas for the creditors, it is in an indicator of what they can expect to receive as return from their investments and a measure of the global risk associated to the company. Our choice fell on Hewlett-Packard (HPQ), whose activities are computer hardwares and is part of the S&P500.

Assumptions

Cost of equity:
Cost of equity is computed by using the CAPM formula (1). This equation links the risk premium on the market (S&P500) to the excess return of the stock (HPQ) by a factor Beta (B). B is the covariance between the market and stock return divided by the variance of the market.

ErE=rf+β∙E[risk premium] (1)

1. Risk-free rate : The first thing to be found is the risk-free rate. The WACC evaluation should be made through eyes of the company’s most probable investors, which we assumed to be American as HPQ is listed on the US market. The best proxy for rf is therefore the US T-bills rate. The time basis used to reflect the lifetime of the project is assumed to be 10 years, as we estimated it was an acceptable horizon, typically used in case studies (this estimation was reasonably confirmed by bond issuances by HPQ we observed). Hence, the best evaluation taken is 3.36% on 01.03.2011 for a maturity of 10 years (www.treasury.gov). 2. Market return : The second element to find is the market rate. We based our choice on the S&P 500 return since HPQ is quoted in the U.S. market. Through this rate, we can...

...both online and offline. Crowdsourcing is different from an ordinary outsourcing since it is a task or problem that is outsourced to an undefined public rather than a specific body.
Crowdsourcing is related to, but not the same as, human-based computation, which refers to the ways in which humans and computers can work together to solve problems. These two methods can be used together to accomplish tasks.
Contents:
1 Definitions
2 History
2.1 Historical...

...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...

...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...

...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...

...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...

...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%....

...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...