Nobody downloaded yet

Weighted Average Cost of Capital - Research Paper Example

Comments (0) Cite this document
Summary
The paper “Weighted Average Cost of Capital” tries to investigate which sources of financing a company can employ and in what optimal debt-equity combination. In this context, cost doesn’t refer only to finance cost but also describes the return expected by the investors.
 
 …
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER95.9% of users find it useful
Weighted Average Cost of Capital
Read TextPreview

Extract of sample "Weighted Average Cost of Capital"

Download file to see previous pages To understand the dynamic of Weighted Average Cost of Capital (WACC) we must further understand the concept of required rate of return.
Return of particular investments is measured on two levels. An investor will first of all asses the size of return, for example, 10% return is always better than an 8% return. The second measure is the timing of returns; this is because investors always prefer payments today rather than tomorrow. For this purpose present values of all returns are first calculated when analyzing attractiveness.
Return that investors and lenders expect from each investment is different. For example, a loan to Microsoft will have a lower expected return than a loan issued to a startup firm. This is because investors always prefer low risk. A risk is a threat that a firm will fail to fulfill future obligations. There are many different types of risk associated with a firm such as DRP (default risk premium), Liquidity premium and MRP (market risk premium). The lower is the risk associated with a particular investment consequently less will be the rate of return required by the investor.
As mentioned there are three main sources of financing that a firm can employ. They have their own benefits and limitations.
Debt financing is the borrowing of money from individuals or financial institutions, under an agreement that the principal along with interest payments will be paid in the future. In the case of debt financing, lenders have no ownership in the company and therefore do not share in the risk of doing business. This gives them first charge in case of liquidation. This means that lenders have the first right to a company’s assets if it goes bankrupt.
Estimating the cost of capital for debt is a very complex process. This is because there is much difference in different types of debt instruments that a company can use. These include fixed rate debt, floating rate debt, straight debt, convertible debt etc. There are two main sources of debt that companies use to finance their operations. ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Weighted Average Cost of Capital Research Paper, n.d.)
Weighted Average Cost of Capital Research Paper. Retrieved from https://studentshare.org/finance-accounting/1730910-finance-reserch-paper-could-be-anything-which-fit-the-requirment
(Weighted Average Cost of Capital Research Paper)
Weighted Average Cost of Capital Research Paper. https://studentshare.org/finance-accounting/1730910-finance-reserch-paper-could-be-anything-which-fit-the-requirment.
“Weighted Average Cost of Capital Research Paper”, n.d. https://studentshare.org/finance-accounting/1730910-finance-reserch-paper-could-be-anything-which-fit-the-requirment.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Weighted Average Cost of Capital

Average Cost Curves

...The Long and the Short of Average Cost Curves The Acme Lawn Mower Company has solidified the design of its revolutionary new mower. The revolutionary all wheel drive mower has been well accepted by the marketplace and they are in a position to sell all they can manufacture. They are ramping up production levels and will soon approach full capacity. In the short run, they are concerned about the quantity they can build that will maximise profits from their existing capital. They are also making decisions on how to best utilise their labour force and management team. In the long run, they are planning for future expansion and making a determination whether to expand the existing facilities...
4 Pages(1000 words)Case Study

Importance of managing the firms weighted average cost of capital (WACC)

...A. Importance of managing the firm's weighted average cost of capital (WACC) The WACC of a firm is the best indicator of its profitability.It is theaverage cost at which a company raises its capital from various sources, as all companies must, through debt or equity.This includes common stock, preferred stock, bonds, and any other long-term debt. This cost is calculated as a weighted average, by taking into account the proportional relevance of each source, including the effects of taxes. If the cost of capital of a company is high,or it has a high WACC,...
2 Pages(500 words)Essay

Effect of Capital Structure on the Weighted Average Cost of Capital

... TABLE OF CONTENT PAGES WACC 03 EFFECT OF CAPITAL STRUCTURE ON WACC 03 OPTIMAL STRUCTURE 04 CALCULATION OF WACC 06 CALCULATION EARNING PER SHARE 07 ESTIMATING LEVERAGES 10 QUICS 12 CAPITAL STRUCTURE COMPARASION 12 CONCLUSION 14 BIBLIOGRAPHY 14 REFERENCES 14 This study discusses about the cost of capital and weighted average cost of capital (WACC). It also includes estimation of WACC and different leverages and analysis through leverages and financial ratios are also included in the study. The study gives a very good idea about the...
9 Pages(2250 words)Coursework

Estimation of Weighted Average Cost of Capital

...Estimation of Weighted Average Cost of Capital Introduction The success of a corporate entity largely depends upon the way in which it is financed orthe capital structure. It has been well acclaimed that maximization of shareholders' wealth and firm's value is most the operational and popular objective of financial management. To increase the shareholders' wealth and firm's value in the market, it must have a capital structure which protects the interest of all stakeholders. Such a capital structure is known as the optimum/optimal capital structure. The present paper describes and analyses the...
2 Pages(500 words)Essay

The Weighted Average Cost of Capital

...Week 2 Qs Which portion of the Weighted Average Cost Capital calculation is impacted by taxes How can a company reduce its cost of capital How is WACC used in financial planning to optimize capital structure The Weighted Average Cost of Capital is the firms cost of capital which is calculated while taking the weights of each source in mind. Sources include the cost of debt and the cost of equity. The Formula for weighted average...
3 Pages(750 words)Essay

Weighted-average cost of capital and capital structure

...Dissertation Proposal Weighted-Average Cost of Capital and Capital Structure 2. Rationale of the study These days the world community isfast coming to terms with the recessionary trends in almost all sectors. The corporate world is under severe pressure to cut costs and do justice with the existing workforce. On the one hand companies are trying to gain valuable support from the respective governments; while on the other hand, all efforts are being made to do away with undue expenditures, and making the capital structure optimal in efficiency. Weighted Average Cost of...
4 Pages(1000 words)Essay

Weighted Average Cost of Capital (WACC)

.... Asset turnover in Siemens 3-year business operations are somehow maintained on the average of 1 in utilizing its assets because the changes from year over year is not so marginal while asset turnover of Merge for 4 years (2003-2006) did not even reached to 0.5, meaning that not even half of its assets were utilized during this period. Only in 2007 that assets were utilized more reaching to 1.04 turnovers. Capital expends to total assets and sales in Siemens were comparatively high compared to Merge in all the years of business operations. Siemens Medical Diagnostics Solutions Limited Merge Healthcare Incorporation LEVERAGE...
5 Pages(1250 words)Essay

Limitations of Weighted Average Cost of Capital as a Method of Investment Appraisal

...LIMITATIONS OF WACC AS A METHOD OF INVESTMENT APPRAISAL Introduction Weighted average cost of capital is an example of discounted cash flow analysis which is a method for valuing a project or company based on the value of money at any given time (Copeland, Koller and Murrin, 2000, p. 67). The weighted average cost of capital (WACC) of a company is defined as the weighted average of the cost of debt and the cost of equity, where the weightings are determined by relative levels of debt and the equity in the firm’s asset...
2 Pages(500 words)Essay

Weighted Avarage Cost of Capital

...Weighted Average Cost of Capital WACC Any project or business in the organization is financed by either equity or debt. In order to enhance the value of equity, the project is never financed 100 percent by equity route, instead an appropriate debt proportion is chosen to finance the project. Equity and debt proportion varies with the business and depends upon several factors; however, usually the proportion is found to be 1:1, or 1:2 or somewhere in that line. Rarely, the proportion of equity and debt in the project exceeds 1:2 because higher debt increases the risk of the firm as during the market downturn, higher interest burden might put the firm in jeopardy. Weighted average cost of the capital (WACC) is calculated based... on their...
2 Pages(500 words)Research Paper

Cost of capital, weighted avareage cost, cash flow, marginal cost

...3rd year Return 9000 0.693 6237 4th year 8600 0.613 5271.8 Net Present Value(NPV) 6662.8 Calculation of IRR Cash inflows 10000 8000 9000 8600 total=35600 35600/4=8900 20000/8900=2.2472 Year cash flow 22% PVIF Present value 1 10000 1.22 12200 2 8000 1.488 11904 3 9000 1.816 16344 4 8600 2.215 19049 Present value of inflows 59497 PVIF 12% 1 10000 1.12 11200 2 8000 1.254 10032 3 9000 1.405 12645 4 8600 1.574 13536.4 Present value of inflows 47413.4 59497 22% 59497 22% 47413.4 12% 40000 Cost 12083.6 19497 22%+19497/12083.6(10%)=22%+1.61351(10%)=22%+16.13%=38.13% 3).Weighted average cost of capital refers to the average rate return a firm...
2 Pages(500 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Research Paper on topic Weighted Average Cost of Capital for FREE!

Contact Us