chapter 12 - Chapter 12 The weighted average cost of...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
COPYRIGHT©ZHULI 1 Chapter 12 The weighted average cost of capital and company valuation
Background image of page 1

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

View Full DocumentRight Arrow Icon
COPYRIGHT©ZHULI 2 Objectives 1. Calculate a firm’s capital structure 2. Estimate the required rates of return on the securities issued by the firm 3. Calculate the weighted-average cost of capital 4. Understand when the weighted-average cost of capital is – or isn’t – the appropriate discount rate for a new project 5. Use the weighted-average cost of capital to value a business given forecasts of its future cash flows
Background image of page 2
COPYRIGHT©ZHULI 3 Content Geothermal’s cost of capital The weighted-average cost of capital Measuring capital structure Calculating required rates of return Calculating the weighted-average cost of capital Interpreting the weighted-average cost of capital Valuing entire businesses
Background image of page 3

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

View Full DocumentRight Arrow Icon
COPYRIGHT©ZHULI 4 Assume the debt’s yielding 8%, and tax rate is 35%, equity investors want 14% Capital structure : the mix of long-term debt and equity financing
Background image of page 4
COPYRIGHT©ZHULI 5 Long-term debt financing: ¤ t j ¶ “ 3 Equity financing: h& & &
Background image of page 5

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

View Full DocumentRight Arrow Icon
COPYRIGHT©ZHULI 6 Content Geothermal’s cost of capital The weighted-average cost of capital Measuring capital structure Calculating required rates of return Calculating the weighted-average cost of capital Interpreting the weighted-average cost of capital Valuing entire businesses
Background image of page 6
COPYRIGHT©ZHULI 7 Calculating company cost of capital as a weighted average The company cost of capital is a weighted average of the returns demanded by debt and equity investors. The weighted average is the expected rate of return investors would demand on a portfolio of all the firm’s outstanding securities
Background image of page 7

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

View Full DocumentRight Arrow Icon
COPYRIGHT©ZHULI 8 r assets = 78.94/647 = 12.2%
Background image of page 8
COPYRIGHT©ZHULI 9 Debtholders need income of (r debt × D), and the equity investors need expected income of (r equity × E). The total income that is needed is (r debt × D) + (r equity × E). The amount of their combined existing investment in the company is V. (ignoring taxes)
Background image of page 9

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

View Full DocumentRight Arrow Icon
COPYRIGHT©ZHULI 10 Market versus book weights The cost of capital must be based on what investors are actually willing to pay for the company’s outstanding securities—that is, based on the securities’ market values Financial managers use book debt-to-value ratios for
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 40

chapter 12 - Chapter 12 The weighted average cost of...

This preview shows document pages 1 - 11. Sign up to view the full document.

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