{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# Lecture 36 - Business Finance(ACC501 Lesson 36 Review of...

This preview shows pages 1–2. Sign up to view the full content.

186 Business Finance (ACC501) Lesson 36 Review of the Previous Lecture Cost of Capital Cost of Equity Cost of Debt Cost of Preferred Stock Capital Structure Weights The Tax Effect Weighted Average Cost of Capital To calculate the firm’s overall cost of capital, we multiply the capital structures with the associated costs and add up the pieces. The result is called the Weighted Average Cost of Capital (WACC) WACC = (E/V) x R E + (D/V) x R D x (1 – T C ) The WACC is the overall return the firm must earn on its existing assets to maintain the value of the stock. It is also the required return on any investments by the firm that have the same risks as exiting operations. So for evaluating the cash flows a proposed expansion project, this is the discount rate to be used. For the firm using preferred stocks in its capital structure, the WACC would be: WACC = (E/V) x R E + (P/V) x R P + (D/V) x R D x (1 – T C ) Suppose a company wants to renovate its warehouse distribution system. The plan will cost \$50 million and is expected to save \$12 million per year after the taxes over next six years. The company has a target debt-equity ratio of 1/3 (i.e. E/V is 0.75 and D/V is 0.25). The company has a cost of debt of 10% and a cost of equity of 20%.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern