Вы находитесь на странице: 1из 21

# 11

Calculating the
Cost of Capital
Finance 3rd Edition

## The WACC Formula

Weighted Average Cost of Capital (WACC)
Average cost per dollar of capital raised

values

11-2

WACC

11-3

## Component Cost of Equity

Two ways to calculate
Capital Asset Pricing Model (CAPM)
Constant-growth model

11-4

## Component Cost of Equity and CAPM

Not appropriate when historical data
insufficient or not good indicator of future
CAPM generally more accurate

11-5

## Use when constant dividend growth

expected on limited number of stocks

11-6

## Component Cost of Preferred Stock

Calculate with constant-growth model

11-7

## Component Cost of Debt

Two-part calculation
1) Estimate before-tax cost of debt using Yield
to Maturity
2) Solve for interest rate that makes price equal
to sum of present values for coupons and
face value of bond

11-8

## Component Cost of Debt

Debt is tax deductible
Two-part calculation adjusts to after-tax rate
of return

11-9

Tax Rates
Firms marginal tax rate affects benefit of
debt-interest deductibility
WACC tax rate
Weighted average of marginal tax rates on
income shielded by interest deduction

11-10

## Calculating WACC Weights

Percentages of funding that come from
Equity
Preferred stock
Debt

11-11

## Firm vs. Project WACC

Firm WACC
Use for evaluating typical projects

Project WACC
Use with atypical projects, i.e. high- or lowrisk

11-12

Divisional WACC
Less time-consuming, uses fewer
resources
Divides firms existing projects into
divisions
WACC based on each divisions average
project risk

11-13

Risk-Appropriate WACC
Sloped line represents return rates and
risk

11-14

Risk-Sensitive WACC

Expected returns
greater than
WACC

Expected returns
less than WACC

11-15

## Inappropriate Use of Firm-wide WACC

Incorrect
Decisions
11-16

Divisional WACC
Use of divisional WACC reduces errors

11-17

## Subjective vs. Objective

Subjective approach to assessing risk
Created only for current project

11-18

## Subjective vs. Objective

Objective approach more precise, harder
to implement
May use CAPM formula

11-19

Flotation Costs
Externally-generated capital
Stock issues
Bond issues

## Issuing securities generates underwriting

costs such as commissions

11-20

Flotation Costs
Two ways to account for flotation costs
1) Increase costs as percentage of WACC
2) Adjust initial project investment upwards

11-21