The project is financed with the same amount of debt

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Unformatted text preview: hole. (48) WACC §E· §D· rD (1  Tc )¨ ¸  rE ¨ ¸ ©V ¹ ©V ¹ Where TC is the corporate tax rate. The after-tax WACC can be used as the discount rate if 1. The project has the same business risk as the average project of the firm 2. The project is financed with the same amount of debt and equity Download free ebooks at bookboon.com 66 Corporate Finance Corporate financing and valuation If condition 1 is violated the right discount factor is the required rate of return on an equivalently risky investment, whereas if condition 2 is violated the WACC should be adjusted to the right financing mix. This adjustment can be carried out in three steps: - Step 1: Calculate the opportunity cost of capital o Calculate the opportunity cost of capital without corporate taxation. o - D E rD  rE V V Step 2: Estimate the cost of debt, rD, and cost of equity, rE, at the new debt level o - r rE r  (r  rD ) D E Step 3: Recalculate WACC o "Relever the WACC" by estimating the WACC with the new financing weights Please click the advert Fast-track your career Masters in Management Stand out from the...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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