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fm10 17 - Market Conditions Level Of Interest Rates Tax...

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g. What is your final estimate for the cost of equity, r s ? Answer: The final estimate for the cost of equity would simply be the average of the values found using the above three methods. CAPM 14.2% DCF 13.8 BOND YIELD + R.P. 14.0 AVERAGE 14.0 % h. What is Harry Davis’ weighted average cost of capital (WACC)? Answer: WACC= w d r d (1 - T) + w ps r ps + w ce (r s ) = 0.3(0.10)(0.6) + 0.1(0.09) + 0.6(0.14) = 0.111 = 11.1%. i. What factors influence Harry Davis’ composite WACC? Answer: There are factors that the firm cannot control and those that they can control that influence WACC. Factors The Firm Cannot Control
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Unformatted text preview: : } Market Conditions Level Of Interest Rates Tax Rates Factors The Firm Can Control : Capital Structure Policy Dividend Policy Investment Policy j. Should the company use the composite WACC as the hurdle rate for each of its projects? Answer: No. The composite WACC reflects the risk of an average project undertaken by the firm. Therefore, the WACC only represents the “hurdle rate” for a typical project with average risk. Different projects have different risks. The project’s WACC should be adjusted to reflect the project’s risk. Mini Case: 10 - 17...
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