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What impact does WACC have on capital budgeting and structure?

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βˆ™ 2008-07-07 22:43:56

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What impact does WACC have on capital budgeting and structure?

2008-07-07 22:43:56
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When is WACC an appropriate discount rate when doing capital budgeting?

WACC is appropriate where company is using differnt kind of capital like debt and equity for doing capital budgeting.


What is the objectives of capital structure?

The objective of capital structure is minimize the WACC cost.


Why is WACC a more appropriate discount rate when doing capital budgeting?

Because it lets the firm know what return it must get on its capital to maintain the value of the company.


How is WACC used in capital budgeting analysis when utilizing the IRR method?

See the following Wiki topic: http://en.wikipedia.org/wiki/Capital_budgeting


What is the optimal capital structure?

optimal capital stucture is that where the firm value is high and the wacc of the firm is low and that capital structure a firm can follow constantly and that capital stucture not become a burdon on firm.


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.


How do you calculate WACC?

how to calculate WACC how to calculate WACC how to calculate WACC how to calculate WACC


What is the advantage of WACC?

All else equal, the weighted average cost of capital (WACC) of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.


What does wacc measure?

WACC is a component used in finance to measure the company's cost of capital, usually as a discounting factor and the companies use debt or equity for financing.


What is the difference between WACC and cost of capital?

Cost of capital is that amount which is incurred by business to acquire cost for working capital or business while WACC(Weighted average cost of capital) is that cost which is calculated if there is more than one type of capital is involved by business to arrange finances for business.


What portion of the WACC calculation is impacted by taxes?

The cost of debt is affected by taxes. The debt portion of the WACC is calculated as (total debt / total invested capital)*expected return on debt*(1 - tax rate). More info: http://en.wikipedia.org/wiki/WACC


How do you find the weighted average cost of capital at various combinations?

Weighted Average Cost Of Capital - WACC A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: 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 Tc = corporate tax rate Weighted Average Cost Of Capital - WACC A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: WACC= E/V * Re + D/V* Rd*(1-Tc) 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 Tc = corporate tax rate


Conceptual difference between marginal cost of capital and weighted average cost of capital?

WACC is the total average cost of capital to company which is calculated by taking into account the weights of all type of capital existed at a particular date in the capital structure of the company (Equity, Debt, bonds, debentures etc). while the MCC is the incremental cost of capital which comes into existence when fresh capital is raised. It will depend on the type of capital raised, its weight and its cost.


Why WACC represents an opportunity cost to investors?

Wacc Farmula


What happens to the WACC when the federal reserve tightens credit?

WACC will increase.


What is the WACC of RIL?

WACC is defined ( Weighted average cost capital ) Discount Rate. Cost of equity ( CAPM ) * Common Equity + ( cost of debt) * total debt. Calculation of formula results in input for discounted cash flow.


Why doesn't everyone calculate WACC the same?

because of WACC nature, there are no same utility, and that's why none make same calculation. so WACC=X2+2X3+5X2=0 ? because of WACC nature, there are no same utility, and that's why none make same calculation. so WACC=X2+2X3+5X2=0 ?


What is the relationship between wacc and discount rate of return?

relationship between WACC and required rate of return.


What do you mean by horizon value in finding the NPV of a stock?

horizon value = FCF(1+g)/WACC - g where FCF = Free cash flows at current time period or sub zero g= growth rate of firm WACC=weighted average cost of capital ----


How compute cost of debt for WACC of a 5y project for company that has NO access to long-term debt markets?

1. If company has no access to long term debt as a source of capital then weighted average cost of capital will only include the rate of equity as a WACC for discounting long term projects as firm has not a mix of debt and equity to finance its investment projects


How does a firm's tax rate affect its cost of capital?

Tax rates, which are influenced by the president and set by congress, have an important impact effect on the cost of capital. Tax rates are used when we calculate the after-tax cost debt for use in the WACC. In addition, the lower tax rate on dividends and capital gains than on interest income favors financing with stock rather than bonds. Lowering the capital gains tax rate relative to the ordinary income would make stocks more attractive, which would reduce the cost of equity relative to that of debt. This would lead to a change in a firms optimal capital structure toward less debt and more equity.


What portion of the WACC calculation is impacted by the marginal taxes?

The WACC is determined from two separate calculations, one based on the cost of equity and the other on the cost of debt. The 'cost of debt' calculation can take into account the tax rate. The whole calculation uses five variables, and the tax rate serves to reduce the 'cost of debt' percentage. The bigger the tax rate, the greater the impact on the cost of debt. The lower the tax rate, the smaller the impact. However, as there are five variables in the whole calculation, and the sums, magnitude and significance will differ from company to company, the only way to determine the impact of tax rates (marginal or otherwise) in a particular case is to do comparative calculations of WACC, one with, and the other without the tax rate element. By calculating the difference between the two results, one can determine the precise impact/significance of including/excluding tax considerations when calculating WACC for a particular corporate scenario. In a company with a large cost of debt and a small cost of equity, the effect of the rate of tax (in the WACC calculation) will be higher than that in a company with a high cost of equity and a low cost of debt. In other words, the relative weighting of the 'cost of debt' against the 'cost of equity' is an important influencing element in the WACC computation. N.B. When calculating WACC, the 'after-tax' percentage (i.e. with due allowance for the tax rate,) is generally considered to be a better indicator of the true WACC for a particular company than omitting tax liabilities entirely from the calculations.


What is the most prevelant discount rate used in DCF analyses?

Weighted average cost of capital (WACC) is the dominant discount rate used in DCF analyses.


What is the formula for calculating wacc?

The Weighted Average Cost of Capital (WACC) reflects the average 'cost of financing' for a firm. Firms raise money in several ways, such as issuing equity, debt, and preferred stock. The WACC is calculated by taking the (after-tax) 'cost' of each of these forms of financing and multiplying it by the relative proportion of total financing represented by that form of financing.The full formula for WACC is:whererD = The required return of the firm's Debt financing(1-Tc) = The Tax adjustment for interest expense(D/V) = (Debt/Total Value)rE= the firm's cost of equity(E/V) = (Equity/Total Value)V = (D + E), ie Total Firm ValueTo calculate the WACC for a publicly traded company, there is an online WACC Calculator available at http:/www.ThatsWACC.com


What is the WACC of Disney corporation?

3