Unformatted text preview: e = $15/.18 = $83.33 Naïve WACC misses the additional tax shields in yrs 15 11 Sophisticated WACC Valuation The only way to make it work is to adjust the weights every year in the calculation of WACC.
Adjusting the debttoequity ratio changes your estimation of the cost of equity (Rs). This change in Rs together with the changes in the weights B/(B+S) and S/(S+B) will change WACC.
WACC will be different for each of the years 1 to 5, and will be constant and equal to 18% starting in year 6.
This is because in year 6, all new debt has been retired, and so the firm is back at its target capital structure,...
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This document was uploaded on 03/09/2014 for the course COMM 371 at UBC.
- Spring '13