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 the weighted average cost of capital” (Ehrhardt and Brigham,). The meaning and usage of corporate valuation is mainly focused on the estimation and forecasting the financial statements under alternative strategies. On top of that, finding the present value of each cash flow stream and choosing among these strategies according to which strategy provides the maximum value for the company. According to Bloomberg, BlackBerry’s weighted average cost of capital is 13.8%, which is considered to be high comparing to other companies (Bloomberg, 2013). That also could be explained by the...
References: Eugene F. Brigham, Michael C. Ehrhardt (2010) Financial Management: Theory and Practice. South-Western Publishing.
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