Principles of Finance · free preview
The Weighted Average Cost of Capital
The weighted average cost of capital blends the after-tax cost of debt and the cost of equity at their market-value weights, producing the single discount rate that prices the firm's projects and investment decisions.
1. The WACC formula
The WACC formula
2. Weights from market values
Weights from market values
3. The hurdle rate for investment
The hurdle rate for investment
4. The WACC across the course
The WACC across the course
5. Computing the WACC
A firm finances with 40 percent debt at an after-tax cost of 4.99 percent and 60 percent equity at a cost of 9.6 percent. What is its WACC?
6. The weights' basis
On what basis should the WACC's weights be computed?
7. The hurdle role
In the NPV computation, what does the WACC represent?
8. Single rate's limitation
What is the known inaccuracy of using the firm's single WACC to discount all projects?
9. Target versus current weights
Why might a firm compute its WACC at a target structure rather than today's actual weights?
10. The WACC's course-wide role
Which statement best captures the WACC's role across this course?
11. The blend's two words
What two-word term names the blended rate that averages the costs of debt and equity? Answer in lowercase.
12. The weights' sum
The market-value weights of debt and equity in the WACC formula sum to what number? Write the number.
13. The tax-adjusted component
Which WACC component enters after tax, debt or equity? Answer with one word.
14. The structure that minimizes the rate
What one-word term names the capital structure that minimizes the WACC and thereby maximizes firm value? Answer in lowercase.
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