P2 The WACC

P2 The WACC - The WACC MPR Inc has only two types of...

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The WACC MPR Inc. has only two types of investors, debtholders and stockholders. Each type of investor expects to receive a return for their investment. The return an investor receives is a “cost of capital” from company’s viewpoint Shareholders require 12%, Cost of equity is Bondholders require 9%, Cost of debt is The WACC (Cont’d) WACC is average of costs to all investors, weighted by the proportion that is financed by each type. Since we are going to use this cost of capital to discount future cash flows, the relevant mixture of debt and equity is the mixture that is expected to prevail in the future, This is called the target capital structure . For MPR, target percent financed by equity: w S = 70%, target percent financed by debt: w D = 30%. WACC = w D r D (1-T) + w S r S = 0.3(9%)(1 - 0.4) + 0.7(12%) = 10.02% Calculating Free Cash Flows The FCF is the amount of cash available from operations for distribution to all of the firm’s investors, after making the necessary investments to support operations. In calculating FCF, we start with the firm’s operations, Activities associated with factories, equipment, workers, sales force and managers, Basically all the activities a firm needs to make and sell its
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P2 The WACC - The WACC MPR Inc has only two types of...

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