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How do free cash flows and the weighted average cost of capital interact to determine a firms value?
Wiki User
∙ 10y ago
A firm value is the sum of future expected free cash flows converted into today's dollars
Wiki User
∙ 10y ago
Free cash flows represent the cash generated by a firm that is available to be distributed to investors. The weighted average cost of capital (WACC) is the average rate of return required by investors in order to finance the firm's operations. By discounting the free cash flows at the WACC, we can determine the present value of those cash flows, which ultimately determines the firm's value. If the present value of the free cash flows exceeds the firm's invested capital, then the firm is considered to have positive value.
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How do free cashflows and weighted average cost of capital interact to determine a firms value?
they interact because of the gravity
What are the limitations of the weighted average cost of capital?
One limitation of the weighted average cost of capital is that a firm may possibly end up having a negative Net Present value. This occurs if the weighted average cost of capital gives a discount rate that is too low.
Who sets weighted average cost of capital?
It must be the managers
Why is Weighted Average Cost of Capital important to an organization?
imoportant of capital cost to a hotel imoportant of capital cost to a hotel
How are the weights determined to arrive at the optimal weighted average cost of capital?
estimates
A firm's cost of finaning in an overall sense is equal to its?
Weighted average cost of capital.
What are the various bases for determining the proportions to be employed in calculating the weighted average cost of capital?
i have to study
When is it appropriate to use a firms weighted average cost of capital?
It is appropriate to use a firm's weighted average cost of capital when valuing a cash flow for the firm. For example, given an investment opportunity where an initial outflow is followed by a series of cash inflows, the company must determine the investments value in present terms to ascertain whether the investment is a viable option for the corporation. The quantify the present value of the future cash flows, the company will use its weighted average cost of capital since this number will embody the required rate of return to meet or exceed the company's cost of financing.
What is after tax wacc?
WACC stands for weighted average cost of capital. So after tax means cost of capital after taxes are taken into account.
What is after-tax wacc?
WACC stands for weighted average cost of capital. So after tax means cost of capital after taxes are taken into account.
What is the capital requirement of universal banks?
Capital requirement is the amount of capital a financial institution is required to hold. The capital requirement for Universal Banks is four percent of their weighted average calculation.
What internal benefits does using WACC offer for a company?
The weighted average cost of capital (WACC) represents a firm's average cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. The weighted average cost of capital is a common way to determine require rate of return because it expresses, in a single number, the return that both bondholders and shareholders demand in order to provide the company with capital. A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will demand greater returns.
