Wacc Formula

A1 of 3 Formulas involved on the WACC calculations Corpo tempo Finance - MBA 2009 raze scripted by Prof. Carles Vergara-Alert & Prof. Pedro Saf? 1 Objective This note tries to sort out the different as unificationptions and faces employ to calculate the Weighted fair(a) Cost Of Capital (WACC) that you go out ?nd in different textbooks and articles. 2 The WACC formula The WACC formula is a weigthed middling of the salute of loveliness and the after-tax woo of debt: W ACC = E D+E RE + D D+E (1 ? ? )RD (1) organism RE the damage of stomachdor, RD the cost of debt, ? the corpo rove tax, E the market set of the ?rms equity, and D the market respect of the ?rms debt. Note that sometimes we call V to the sum of D and E, therefore, V = D + E. Sometimes, not all the ?nancing is provided by debt and equity. As an example, let us assume that some ?nancing is provided by preferable stock as well as equity and debt. The WACC formula has to be modi?ed to include th e main sources of long ?nancing of the ?rm such as preferred stock: W ACC = E D P RE + (1 ? ? )RD + RP D+E+P D+E+P D+E+P where RP is the cost of preferred stock and P is the market value of the ?rms preferred stock.

3 Using the WACC formula It is straightforward to stupefy approximately of the values for the variables in the WACC formula (lets centralise on formula (1) from now on): The market value of the ?rms equity (E) can be simply estimated as the value of the ?rms shares times the number of shares. The book value of the ?rms debt can be used as a placeholder for the market value of the ?rms debt ( D). The corporate tax rate is precondition! (ex. ? = 34% can be used as a proxy for federal tax rate in the US). The cost of debt RD should re?ect the reality of the caller. Each company knows its debt rate premium that they will have to pay for their debt, that is, it knows the allot everywhere the treasury that lenders will require to lend bully to this extra ?rm1 ); therefore, RD = RF + Companys debt premium where RF is the...If you wishing to get a full essay, order it on our website: BestEssayCheap.com

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