WACC = r WACC WE RE WD RD (1 T )

Percent financed with Equity - aka Capital

WEE Structure Weight of Equity
10,000 (E) = value of equity = (# shares * p

WE E V 50,000 (D) = value of debt = (# bonds * bon

60,000 (V) = market value of the firm = D +

Cost of Equity - Using Dividend Growth or - (D1) = next dividend

REE CAPM method
D1 - (P0) = Present share value
RE g - (g) = expected dividend growth
OR P0
9.5% (RM) = Market Risk
CAPM R E R f b ( RM R f ) 1.50 (b) = Systematic Risk of the asset
2.5% (Rf) = Risk free rate
RE = Expected Return 7.0% (RM - Rf) = Market Risk Premium, m

Percent financed with Debt - aka Capital

WDD Structure Weight of Debt
10,000 (E) = value of equity = (# shares * p
50,000 (D) = value of debt = (# bonds * bon
WD D V 60,000 (V) = market value of the firm = D +

Cost of Debt - Use the 10 NPER

RDD
60 Pmt
RATE ( Nper , PMT , PV , FV ,0) 900 PV
1,000 FV

Tax
Taxes
40% (T) = Tax rate
 5.9%

e of equity = (# shares * price per share)

17%
e of debt = (# bonds * bond price)
ket value of the firm = D + E

ent share value

#DIV/0!
cted dividend growth

matic Risk of the asset

13.0%

Market Risk Premium, may be given

e of equity = (# shares * price per share)

83%
e of debt = (# bonds * bond price)
ket value of the firm = D + E

7%

60%
 1 O
O O
O O
O
3
O
O O
O
C
C C
C C
C
CF
CF CF
CF
FF FF FF

Beginning Cash Flow - initial investment, opportunity cost, set-up cost, net working capital (NWC)
1 *Do not include sunk costs.

Beginning Cash Flow I Opportunit yCosts SetUpCosts NWC

Operating Cash Flow - revenues, costs, taxes, depreciation (subject to CCA taxes). *Do not
2 include interest, it is part of the WACC. There is two parts to part 2 - operating cash flow (OCF)
and and tax shield adjustment.

If (D) depreciation expense is at a constant rate (i.e. straight line), just use this to calculate the
OCF.

A 1 1 (1 r ) N
( R C )(1 T )

r
TWIST ALERT - if the expected amount of income generated aka cash revenues is growing, use
this formula to calculate the income as a GROWING annuity.

1 g N
1
( R C )( 1 T ) * 1 rN
r g

If (D) depreciation expense is not a constant rate, add this for each asset to calculate the OCF.

C 0dT 1 0.5r SdT 1

B PV tax shield on CCA
dr 1 r d r (1 r ) n

Ending Cash Flow - is the PV of Salvage Value (machines, equipment, etc), NWC, and sale of
3 land.

( S NWC Land )
(1 r ) N
( S NWC Land )
(1 r ) N
 :) :) :)

NPV = 1 2 3 $358,233

WACC = r

(I) = Investment 1 -$1,250,000

50,000 (NWC) = Net Working Captial
450,000 (CI1) = Capital Investment i.e. building
(CI2) = Capital Investment i.e. machine
750,000 (C) = Opportunity Cost of Land

2 $702,396

150,000 (R) = Revenue

A $576,993
20,000 (C) = Costs
40% (T) = Tax rate
5.89% (r) = WACC
10.0 (N) = Number of periods Insert in
A

Machine
40% (T) = Corporate Tax Rate
B $125,403
5.89% (r) = WACC

450,000 (C1) = Capital Investment i.e. building Building

(C2) = Capital Investment i.e. machine
B $0
20% (d1) = CCA tax rate
(d2) = CCA tax rate
56,000 (S1) = Salvage value
(S2) = Salvage value S2
10 (N) = Number of periods

50,000 (NWC) = Net Working Captial

3 $905,837
56,000 (S) = Salvage value S1
 3

(S) = Salvage value S2

1,500,000 (S) = Salvage value => land sale