The Weighted Average Cost of Capital is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation.
j. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy? k. What are some
A US multinational company is required to report its financial results in US dollars. How does this create currency exchange risk for the company? What is the term which most accurately describes this particular risk? 4. Identify and describe the ways in which a US company can participate in international commerce.
Chapter 20 - Forming and Operating Partnerships Chapter 20 Forming and Operating Partnerships SOLUTIONS MANUAL Discussion Questions 1. [LO 1] What is a flow-through entity, and what effect does this designation have on how business entities and their owners are taxed? Flow-through entities are entities that are not taxed on the entity level; rather, these entities are taxed on the owner’s level. These types of entities conduct a regular business; however, the income earned and deductions allowed are passed to the owners of these flow-through entities, and the owners are taxed on the amount allocated to them. Thus, flow-through entities provide a way for income and deductions to be taxed only once instead of twice.
| | |WACC for PepsiCo | | | | | The weighted average cost of capital (WACC) for a firm is the after tax cost of each type of financing (debt and equity) times the percentage of each type of financings. The calculation can be stated as: [pic] Formula 1 Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Source: http://www.investopedia.com/terms/w/wacc.asp, 7/24/11. In order to calculate the WACC, we need to determine the cost of debt, cost of equity and the market value percentage of each Cost of Equity. The cost of equity will be calculated using a simple average of the CAPM from Case 6, 7.82% and the Discounted Dividend Model (DDM). The formula for DDM is: R= (Div/P) +G Where P= Share Price, Div= Next Year’s Dividend, G=Constant annual dividend growth rate.
Money has four major functions and medium of exchange is what the nation uses the most in current economy. Medium of exchange is where seller accepts money in exchange of goods and services. The central bank manages nation’s monetary system by selling government bonds in the open-market to maintain control of supply and demand of money. Economic recovery is the stated direction of the recent monetary policy in the United States. Interest rates can effect economy’s production and
Week 5 Assignment Questions 14-24 What is the purpose of the dividends-received deduction? What corporations are entitled to claim this deduction? What dividends qualify for this deduction? The purpose of the dividends received deduction is so that corporations would not be taxed at a corporate level a shareholder level or if when dividends or a recipient corporation. The dividends qualifying for the dividends-received deduction are those dividends paid by domestic corporations subject to the corporate income tax.
Answer: C - The opportunity cost of holding excess reserves is A) the discount rate. B) the prime rate. C) the Treasury bill rate. D) the federal funds rate. Answer: D - The Fed uses three policy tools to manipulate the money supply: ________, which affect reserves and the monetary base; changes in ________, which affect the monetary base; and changes in ________, which affect the money multiplier.
$20,000*20 days outstanding= AR $400,000 3-2 Debt Ratio Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio? Equity Multiplier= 2.5 Asset/Equity = 2.5/1 1+1.5= 2.5 Debt/Asset= 1.5/2.5= .6 3-3 Market/Book Ratio Winston Washer’s stock price is $75 per share. Winston has $10 billion in total assets.