Weighted average cost of capital (market value
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This document discusses the weighted average cost of capital (WACC), which is a calculation of a firm's cost of capital using weighted average costs of the different capital components (equity, debt, etc.). It outlines how WACC is calculated using either marginal weights based on new capital raised or historical weights based on book or market value. Market value weights are preferred because investors require market rate of return on market value, not book value, of capital. The document provides an example calculation of WACC using market value weights of equity, preferred stock, and debt. It concludes by listing the WACC and debt weight for some large corporations.
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Educational quizzes are invaluable tools in modern education, serving multiple purposes that enhance the learning experience. They provide immediate feedback, allowing educators to assess students' understanding in real time and identify knowledge gaps. This immediate assessment is crucial for guiding instruction and ensuring students grasp key concepts. Quizzes also reinforce learning through spaced repetition, significantly improving retention compared to passive study methods. Additionally, their interactive nature fosters student engagement and motivation, often incorporating gamified elements that encourage active participation. Quizzes can be used for both formative assessmentsongoing checks that inform teachingand summative assessments that evaluate cumulative knowledge at the end of a unit. Moreover, they develop essential skills like critical thinking and problem-solving, as many quiz formats challenge students to analyze and apply their knowledge rather than simply recall facts. Overall, when integrated thoughtfully into the curriculum, quizzes transform educationFinancial Management Lecture 9 NUML Capital Structure
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capital structure
,
goals and significance of capital structure
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target capital structure
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does capital structure matter
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modigliani and miller theory
WACC.pptx
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The document discusses the weighted average cost of capital (WACC), which is used by company management to evaluate capital projects and transactions. WACC serves as a benchmark for investors to assess whether to invest in a project or company. WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and adding the products together. An example calculation is provided to demonstrate how to determine WACC using the common formula that considers market values of equity and debt, costs of equity and debt, and the corporate tax rate.AFM I CHAP-3 CAPITAL STRUCTURE.pptx
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1. The Net Income Approach suggests that increasing debt financing lowers the overall cost of capital and increases firm value, as long as the cost of debt is less than the cost of equity. Maximum firm value is achieved with 100% debt under this approach.
2. The Net Operating Income Approach assumes the overall cost of capital remains constant regardless of the capital structure. Increasing debt offsets increases in the cost of equity, keeping overall costs unchanged.
3. The Traditional Approach recognizes an optimal capital structure where additional debt initially lowers costs but eventually increases costs and risks as leverage rises. It finds a balance between the two previousCost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...
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This document discusses weighted average cost of capital (WACC) which is a calculation of a firm's cost of capital considering the costs of the different components of the firm's capital structure (debt, equity, preference shares). It defines WACC and explains its importance as the minimum return a firm needs to earn on new projects/investments to break even. The document also outlines how to calculate WACC and the costs of each capital component (cost of equity using CAPM, cost of debt, cost of preference shares). It discusses how WACC is used as a benchmark for projects, in determining leverage limits, for valuation, and in discounting cash flows in a DCF analysis.Valuation of shares 
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This document discusses the cost of capital and its components. It defines cost of capital as the minimum required rate of return for invested funds. The components of cost of capital are discussed as cost of equity, cost of retained earnings, cost of preferred shares, and cost of debt. Various methods to calculate each component are explained, including dividend yield method, dividend growth model, CAPM, and before/after tax costs. The weighted average cost of capital (WACC) is introduced as the weighted combination of each component cost. The importance of using market values over book values for weights is highlighted. Examples are provided to demonstrate the calculation of each cost of capital component and WACC.Cost of Capital and Managing the working capital.pptx
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The document discusses the concepts of cost of capital and working capital. It defines cost of capital as the expected rate of return required to finance an investment. The cost depends on the type of financing used, whether debt, equity, or a mixture. There are different types of cost of capital classified by nature and usage. The document also explains how to calculate the weighted average cost of capital using formulas for cost of debt, cost of equity, and the weighted average. It then defines working capital as current assets minus current liabilities, and discusses factors that influence working capital requirements, different types of working capital needs, and working capital management policies.WACC.pptx
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The document discusses the weighted average cost of capital (WACC), which is used by company management to evaluate capital projects and transactions. WACC serves as a benchmark for investors to assess whether to invest in a project or company. WACC is calculated by multiplying the cost of each capital source (debt and equity) by its weight and market value, and adding the products together. An example calculation is shown to demonstrate how to determine WACC using the common formula that factors in the costs of equity and debt and the corporate tax rate.FM.pptx
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This document discusses the weighted average cost of capital (WACC). It defines WACC as representing a firm's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. The WACC is calculated using a formula that weights the cost of each capital component based on the proportion of that component to the total capital structure. An example calculation is provided to demonstrate how to determine the WACC for a hypothetical company based on given values for the cost of equity, cost of debt, tax rate, and debt-to-equity ratios.Cost of capital
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The document discusses the cost of capital, which is the minimum rate of return that a company must earn on its investments to satisfy all of its capital providers. It provides an example to calculate the weighted average cost of capital (WACC) for Rocky Mountain Motors using the costs of its debt, preferred stock, and common equity. The weights used can be based on either book values or market values. The individual costs of each type of capital are calculated using valuation equations. Flotation costs for raising new capital must also be accounted for in the WACC calculation.
COST OF EQUITY
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The document discusses the cost of capital and various methods for calculating it. It defines cost of capital as the required return on funds provided by creditors and shareholders. It then covers the cost of debt, cost of equity using the dividend growth model and CAPM, weighted average cost of capital (WACC), weighted average cost of equity (WACE), and differences between cost of equity and cost of debt. The cost of capital is important for investment decisions, capital structure, performance evaluation, and dividend policy.Cost of capital, Cost of debt, Cost of equity, Cost of preference shares, Wei...
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Weighted average cost of capital (market value
- 1. WEIGHTED AVERAGE COST OF CAPITAL (MARKET VALUE)
- 2. WACC Weighted Average Cost of Capital (WACC) is defined as the weighted average of cost of each component of capital (equity, debt, preference shares etc) where the weights used are target capital structure. It is assumed that the primary purpose of WACC is to evaluate new projects.
- 3. DIFFERENT TYPES OF WEIGHTS
- 4. MARGINAL WEIGHTS VS. HISTORICAL WEIGHTS MARGINAL WEIGHTS These are the proportion of capital in which the fresh capital for the new project is raised. HISTORICAL WEIGHTS These are the proportion of actual existing capital structure in terms of book value or market value.
- 5. BOOK VALUE V/S MARKET VALUE Book value WACC is calculated using book value weights. The market value WACC is calculated using the market value of the sources of capital. Market value weights are preferred over book value weights.
- 6. Why the market value weights are preferred over book value weights? The book value weights are readily available from balance sheet for all types of firms and very simple to calculate. On the other hand, for market value weights, the market values have to be determined and it is a real difficult task to acquire accurate data for the same especially the value of equity. Still market value WACC is considered appropriate by analysts because an investor would demand market required rate of return on the market value of the capital and not the book value of the capital.
- 7. Calculation of WACC To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula:
- 8. Formula WACC = We Ke + Wp Kp + Wd kd (1 - t) Where: We = Proportion of Equity Wp = Proportion of Preference Wd = Proportion Debt Ke = Cost of equity capital Kp = Cost of preference capital Kd = Cost of debt t = Tax rate
- 9. Example Suppose the stock price is 50 (market vale), there are 14%, 3 million shares of stock, the firm has 9%, 25 million of preferred stock, and 10%, 75 million of debt. The corporate tax rate is 40%.
- 10. Given, Ke = 50 (3 million) = 150 million Kp = 25 million Kd = 75 million Total value V = 150 + 25 + 75 = 250 million We = 150/250 = 0.6 Wp = 25/250 = 0.1 Wd = 75/250 = 0.3
- 11. Calculating WACC WACC = We Ke + Wp Kp + Wd kd (1 - t) = 0.6(14%) + 0.1(9%) + 0.3(10%)(0.6) = 8.4% + 0.9% + 1.8% = 11.1%.
- 12. WACC estimations for some large corporations company WACC Wd Intel 16.0 2.0% Dell computer 12.5 9.1% Wal-Mart (WMT) 8.8 33.3% Coca-Cola 6.9 33.8% Georgia-pacific 5.9 69.9%
- 13. Thank you