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Calculating WACC
Imp
Cost of Capital
Cost of Capital the rate of return that the suppliers of capital, bondholders and owners, require as a
compensation for their contribution of capital.
It can also be viewed as the opportunity cist of funds for the suppliers of capital.
Component Cost of Capital: A source of the companys funding
Marginal Cost: What it would cost to raise additional funds for the potential investment project.
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Imp
WACC
Cost
Weight age
Debt
Kd
Wd
Preferred Stock
Kps
W ps
Equity Stock
Ke
We
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Imp
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Imp
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Beta Estimates are sensitive to the method of estimation and data used:
Estimated Period
Periodicity of the return interval
Selection of an appropriate market index
Use of a smoothing technique
Adjustments for small-cap stocks
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equity
1
(1 t)
D
E
asset
equit y 1
D
1 t
E
Use the target companys debt to equity ratio to find the companys beta.
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asset
equity
1
asset
(1 t)
D
E
1.2
1 (1 0.35)
0.7272
asset
asset
1
1
equit y 1
equity
equity
1 t
D
E
0.4
0.7272 1 (1 0.25)
0.6
1.0908
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