Test Two Review Notes

Test Two Review Notes - Test#2 Review FINA 4325 WACC...

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RDM Test #2 Review – FINA 4325 WACC – weighted average cost of capital (capital discount of the firms gaining and spending) WACC = w d [r d (1-t)] + w E r E W d (weight of debt in capital structure) = mkt value of debt/(mkt value of debt + mkt value of equity) SOURCES OF DEBT: line of credit, term loans, commercial paper, BONDS W E (weight of equity) = mkt value of equity/(mkt value of debt + mkt value of equity) SOURCES OF EQUITY: Internal Equity (Retained Earnings), External Equity (SEOs – Seasoned Equity Offerings) **BV ≈ MV of interest bearing debt Dunder Mifflin Example Current debt: 1,600,000,000 LT debt: 26,500,000,000 1,600,000,000 + 26,500,000,000 = 28,100,000,000 = MV of Debt MV of Equity (stock price x # of shares outstanding) = 2,000,000,000 x 23 = 46,000,000,000 W d = 28,100,000,000/(28,100,000,000 + 46,000,000,000) = .38 W E = 46,000,000,000/(28,100,000,000 + 46,000,000,000) = .62 **SO, for every new dollar raised, .38 of it comes from the debt market and .62 from equity (usually internal) R d = cost of debt from firms (required rate of return on bonds from the investor’s perspective – YTM on bonds) R d (1-t) = after tax cost of debt (b/c you get to deduct interest) R E = cost of equity from firm’s perspective (required rate of return from investor’s perspective)
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Test Two Review Notes - Test#2 Review FINA 4325 WACC...

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