321Class-WACC%20Introduction - The Equity & Debt Mix The...

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The WACC Proposition
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Why Not All Equity?
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Why Not All Debt?
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A Weighty Equation + + + = d e r E D D r E D E WACC * *
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The True Cost of Debt Debt is tax deductible: The government pays part of the cost of debt ( 29 c d d T r k - = 1 - + + + = ) 1 ( * * c d e T r E D D r E D E WACC + + + = d e r E D D r E D E WACC * *
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The Cost of Equity g P DIV r e + = 0 1 ) ( f m f e r r r r - + = β ( 29 E D r r r r d a a e - + =
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Computing WACC The Right Way and The Wrong Way
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Based on Book Value Debt (Total Liabilities) AP: 14294 @ 0%* NP: 5614 @ 12.5%* LT debt: 1884+21059 @ 7.75%* Deferred Tax: 843 @ 0%* Accrued Liab: 5669 Equity 4,803,000 shares @ $1 par outstanding Paid-In Capital: 957 Retained Earnings: 40,175 10
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Book Value Cost of Debt .2896 * 0 + .1137 * .1250 + .4648 * .0775 + .1148 * .1475 = 0 + .0142 + .0360 + .0169
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This note was uploaded on 10/28/2011 for the course FIN 321 taught by Professor Smith during the Fall '08 term at University of Illinois at Urbana–Champaign.

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321Class-WACC%20Introduction - The Equity & Debt Mix The...

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