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FINA301 WACC Day1

# FINA301 WACC Day1 - Exam Example Problem p = DP ^ Given the...

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g P D ˆ 0 1 + = 1 Exam Example Problem p Given the information below, fill in the “g”s for  this stock.    |-------|-------|-------|-------|-------| ks = 13% 0              1              2               3              4              5 1.65          1.98       2.2770      2.5730       2.8303 94.3437 g =             g =            g =          g =

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g P D ˆ 0 1 + = 2 Exam Example Problem p Given the information below, fill in the “g”s for  this stock.    |-------|-------|-------|-------|-------| ks = 13% 0              1              2               3              4              5 1.65          1.98       2.2770      2.5730       2.8303 94.3437 g = g = g = g =
g P D ˆ 0 1 + = 3 TVM question p Your parents start a 529 college fund and intend to deposit \$1500 at the end of each  year for the next 18 years.  They earn 8.5% annually on the money, tax-free.   However, at the end of the 10th year, they reach mid-life crisis and take out \$10,000  for the down payment on a Boxster.  How much LESS money is available for your  education at the end of the 18th year?

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g P D ˆ 0 1 + = 4 Cost of Capital p The firm’s required rate of return  p The firm’s average cost of funds, which is the  average return required by the firm’s investors p What must be paid to attract funds
g P D ˆ 0 1 + = 5 Ignore short-term liabilities

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g P D ˆ 0 1 + = 6 p The use of debt impacts a firm’s ability to use  equity, and vice versa, so the weighted average  cost must be used to evaluate projects,  regardless of the specific financing used to fund  a particular project p MARKET PRICES  n (not book prices) The Logic of the Weighted  Average Cost of Capital
g P D ˆ 0 1 + = 7 Cost of Capital for Various  Industries Industry Firms Cost of Equity Debt (1-t) D/(D+E) Cost of Cap.

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