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o Use of the cost of marginal sources of capital for hurdle rates resulted in
sub-optimal result.
How should the derived number for the cost of capital can be used?
o NPV approach or IRR approach?
o There can be multiple IRR. NPV is always the best approach. NPV dollar
value, IRR is percentage value.
o Adjustment for risk?
Summary
o The reason we calculate WACC is to determine the min acceptable rate of
return on future investment projects
o WACC allows us to separate the investment decision from the financing
decision
o WACC is determined through the use of both quantitative models an
implicit estimation of variables
o Estimation process requires scientific formulae as well as managerial
judgment.
Encana Corporation : Cost of Capital
Deferred taxes (Final Exam?)
o A DT liability represents tax payments that have appeared on the IS but
not yet been paid
o Sometimes firms can write off assts faster for tax purposes for
determining accounting income
o The reduction in tax goes to DT account with the logic that it will have to
be paid later
o In theory, equity should include share capital, R/E and DT
o We assume that DT is not a permanent component of EnCanas Equity.