Calculating the WACC

Calculating the WACC - * Weights should be based on market...

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Calculating the WACC Three Steps to Calculate WACC : 1) Determine the cost of each  individual  source of financing. * Stock:  CAPM or build-up method * Debt:  Borrowing rate * Tip:  Leave the  cost  of each source as a  whole #   rather than converting to decimal to avoid rounding  issues! 2) Estimate the weights for the  different financing sources as a  portion of total financing. 3) Calculate the weighted average of  the after tax cost of each source. * Multiply weights by the cost for each component
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Unformatted text preview: * Weights should be based on market values! Weighted Cost of Capital: 0.20 (10%) (1-0.4) + 0.70 (16%) + 0.10 (10%) = 1.2 + 11.2 + 1 = 13.4% * WACCSo What? Question: What can we do with the WACC? Question: When is WACC the appropriate discount rate? Answer: The WACC is the discount rate for extensions of the firm. Question: What about new projects? Answer: No ! Each WACC component changes....
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This note was uploaded on 11/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Summer '11 term at BYU.

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Calculating the WACC - * Weights should be based on market...

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