Lecture10 - Lecture 10 Cost of Capital 2 Value of the Firm...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Lecture 10 Cost of Capital 2 Value of the Firm r The total value of the assets owned by the firm (V) will be equal to the sum of c Market value of debt (D) and c Market value of equity (E) V=D+E 3 Project evaluation r Two key factors in project evaluation are c Future cash flow estimation c Discount rate r The appropriate discount rate (or cost of capital) is the investorsexpected return c It cannot be observed; must be estimated r Most common approach is to use the weighted-average cost of capital (WACC) 4 WACC r Investors comprise: c Equity investors c Debt investors r We previously calculated expected return {E(r)} using the firms beta and CAPM c This represents the cost of equity capital r Most companies are also financed by debt c Therefore we need to also calculate the cost of debt EgCost of loans, bonds 5 Weighted Average Cost of Capital r To estimate WACC for a project, the first step is to determine the permanent sources of capital used by the firm. Then, each sources cost of capital is calculated at market values, weighted, and summed to arrive at WACC 6 Permanent sources of capital r Include all classes of equity r Include long-term debt r Exclude seasonal short-term debt and accounts payable (these are working capital) r Exclude deferred taxes. 7 WACC r After-tax WACC is summarised by the equation ( ) ( ) 1 e d c E D W A C C r r T V V = + -...
View Full Document

Page1 / 8

Lecture10 - Lecture 10 Cost of Capital 2 Value of the Firm...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online