5 WACC.pdf - Weighted Average Cost of Capital(WACC Cost...

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Example: XYZ Company is in the need to raise $500,000. Equity - Stocks Debt - Loan Expected Return = 10% Required Return = 7% Sources of Capital Cost Equity - Common Shares Cost of Equity Debt - Bonds & Loans Cost of Debt Preferred Shares Cost of Preferred Stock Cost associated to the raising Financing/Capital - COST OF CAPITAL Weighted Average Cost of Capital (WACC) weighted Page 1
WACC Formula: Example: XYZ company is financed with the following. Equity : $600,000 Preferred : $150,000 Debt : $250,000 Weighted Average Cost of Capital (WACC) weighted Page 2
WACC Formula: Example 1: What is the company cost of capital for a firm financed with 30 percent debt if the debt requires a 10 percent return and equity requires a 16 percent return? There are no taxes or preferred shares Weighted Average Cost of Capital (WACC) weighted Page 3
WACC Formula: Example 2: What is the WACC for a firm using 55 percent equity with a required return of 15 percent, 35 percent debt with a required ret urn of 8 percent, 10 percent preferred stock with a required return of 10 percent, and a tax rate of 35 percent? Weighted Average Cost of Capital (WACC) weighted Page 4
WACC Formula: Example 3: Calculate a firm's WACC given that the total value of the firm is $2,000,000, $600,000 of which is debt, the cost of debt and equity is 10 percent and 15 percent respectively, and the firm pays no taxes.

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