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WACC_Slides - volatility in the market Unsystematic Risk is...

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WEIGHTED AVERAGE COST OF CAPITAL (WACC)
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COST OF DEBT D X (1 - T) = Kd D = 7% T = 40% Kd = After Tax Cost of Debt 7% X (1 - 40%) = 4.2% D = Nominal Debt Rate T = Marginal Tax Rate
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COST OF EQUITY CAPITAL ASSET PRICING MODEL (CAPM) Ke = Rf + B X (Rm - Rf) Rf = 5% B = 1.5 Rm = 11% 5% + 1.5 X (11% - 5%) = 14% Ke = Cost of Equity B = Beta Rf = Risk Free Rate Rm = Market Return
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COST OF EQUITY COMPONENTS Risk Free Rate is the theoretical return on a riskless investment, usually a US Treasury Note or Bond is used to approximate Market Return is the long term average return of the equity market. From 1926 to 1993, the average return of the stock market was 10.8%.
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Beta is a measure of a stock’s volatility compared to the market Systematic Risk is the portion of the variation in investment returns that can be eliminated through investor diversification. Reflects the general
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Unformatted text preview: volatility in the market. Unsystematic Risk is the portion of the variation in investment returns that can be eliminated through investor diversification . These variations result from factors that are unique to that particular firm WHAT IS BETA-5.00%-4.00%-3.00%-2.00%-1.00% 0.00% 1.00% 2.00% 1-Aug 2-Aug 3-Aug 4-Aug 5-Aug 6-Aug 7-Aug 8-Aug 9-Aug 10-Aug SCH S&P GM AMAZON BETA EXAMPLE BETA SCH = 2.3 AMZ = 3.3 GM = 1 S&P = 1 Total Debt Percent of Total X Cost of Debt = Weighted Cost of Debt Total Equity Percent of Total X Cost of Equity = Weighted Cost of Equity Total Capital 100% of Capital Weighted Cost of Capital Amount Weight Cost Wght. Cost Total Debt 2,300 $ 33.8% X 4.2% = 1.4206% Total Equity 4,500 66.2% X 14.0% = 9.2647% Total Capital 6,800 $ 100% 10.6853% WACC EXAMPLE...
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