The WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond, the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market, a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market. A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I will be using to calculate the cost of equity is the CAP-M formula and is as follows; KE = RF + B (RM – RF)

RF = Risk free rate, B = Firm’s Beta, RM = Return on the market The cost of debt or KD is calculated by finding the internal rate of return for all the firms bonds. First the coupon on the bond is found for each of the remaining years until maturity, then we deduct tax, finally we choose test two discount factors and put our findings into the following formula; IRR = DCF1 + (DCF2 – DCF1) * NPV1 – 0 / NPV1 - NPV2

Once we have found our KE and KD we must find the weights of both the equity and debt capital. Finally all of this information is entered into our WACC formula which is as follows where MV is is the market value of the company; WACC = (KE * MV of equity / MV of company) + (KD * MV of debt / MV of company)

Cost of Debt
Fiat motors have one bond to the value of $1394.8 billion with a coupon rate of 5.625%, the price of the bond is $78.8 and the maturity date is 06/12/2017. The discount factors I will be using are 3% and 10%.

...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...

...9 Calculating WACC
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and a 35 percent debt. Its cost of equity is 12.5 percent, the cost of preferred stock is 5.5 percent, and the cost of debt is 7.2 percent. The relevant tax rate is 35 percent.
a. What is Mullineaux’s WACC?
b. The company president has approached you about Mullineax’s capital structure. He wants to know why the company...

...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...

...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...

...Weighted Average Cost of Capital
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...

...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...

...Company/Industry Information
Hewlett-Packard Company or HP is a multinational American information technology corporation headquartered in Palo Alto, California. HP provides products, technologies, software, technical support and solutions to various consumer groups. These consumers include small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors.
HP specializes in developing and manufacturing...

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