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Calculating the
Cost of Capital
Finance 3rd Edition
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Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved
WACC
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Tax Rates
Firms marginal tax rate affects benefit of
debt-interest deductibility
WACC tax rate
Weighted average of marginal tax rates on
income shielded by interest deduction
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Project WACC
Use with atypical projects, i.e. high- or lowrisk
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Divisional WACC
Less time-consuming, uses fewer
resources
Divides firms existing projects into
divisions
WACC based on each divisions average
project risk
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Risk-Appropriate WACC
Sloped line represents return rates and
risk
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Risk-Sensitive WACC
Expected returns
greater than
WACC
Expected returns
less than WACC
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Incorrect
Decisions
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Divisional WACC
Use of divisional WACC reduces errors
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Flotation Costs
Externally-generated capital
Stock issues
Bond issues
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Flotation Costs
Two ways to account for flotation costs
1) Increase costs as percentage of WACC
2) Adjust initial project investment upwards
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