Company Cost of Capital - Company cost of capital 1 Table...

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Company cost of capital 1
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Table of Contents 1. The company cost of capital 2. The cost of debt capital 2.1 Estimating the cost of debt 3. The cost of equity capital 3.1 Estimating the cost of equity 3.2 Estimating market risk premium 4. Taxation and the company cost of capital 4.1 Company taxation in Australia and the impact on shareholders 4.2 Company taxation and the impact on shareholder returns 4.3 Incorporating the effect of tax into the company cost of capital 4.4 CAPM under an imputation system of tax 5. Financial reporting and calculating free cash flows 5.1 Statement of cash flows 2
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1. The company cost of capital In Chapter 3, the following expression for the value of a company was presented: where: F t =t h e net cash flows after tax generated by the company for its owners (free cash flow) r= t h e company cost of capital Approximating r is the focus of this lecture V F t 1 r  t t 1 (3.2) 3
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Calculations of company cost of capital involve Estimation of the cost of debt capital (r d ) Estimation of the cost of equity capital (r e ) The impact of corporate tax on the company cost of capital The calculation and forecasting of free cash flows, including: Cash flow reporting in financial statements Preparation of free cash flow forecasts The company cost of capital is then the discount rate to be used for Conducting NPV analyses Valuation of firm 4 1. The company cost of capital
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Shareholders Debtholders COMPANY $2 million invested Opportunity cost = 15% Annual cost = $0.3 million $8 million invested Interest rate = 10% Annual cost = $0.8 million Total liability = $10 million Total annual cost =$1.1 million COST OF CAPITAL= $1.1 million or 11% 5 1. The company cost of capital
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Weighted average cost of capital Since the company cost of capital is a weighted average of the equity cost of capital and the debt cost of capital it is referred to as the weighted average cost of capital (WACC) The WACC is given by the expression: where: r e =t h e cost of equity capital r d h e cost of debt capital D= t h e value of debt used by the company E= t h e value of equity used by the company WACC r d D D E r e E D E (8.1) 6 1.2 WACC
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Example 8.1 Debt holders have contributed $8 million to a company and charge an interest rate of 10% p.a. Equity holders have contributed $2 million and require a rate of return of 15% on their investment. What is the company cost of capital? _______________________________________________ E D E r E D D r WACC e d  . . % 11 11 . 0 20 . 0 15 . 0 80 . 0 10 . 0 2 8 2 15 . 0 2 8 8 10 . 0 a p 7 1.2 WACC
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Table of Contents 1. The company cost of capital 2. The cost of debt capital 2.1 Estimating the cost of debt 3. The cost of equity capital 3.1 Estimating the cost of equity 3.2 Estimating market risk premium 4. Taxation and the company cost of capital 4.1 Company taxation in Australia and the impact on shareholders
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This note was uploaded on 03/09/2012 for the course FINC corporate taught by Professor Kim during the Three '11 term at University of Sydney.

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Company Cost of Capital - Company cost of capital 1 Table...

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