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Essay / Research Paper Abstract
This 7 page paper uses Xerox to demonstrate how to use both the weighted average cost of capital and the capital-asset pricing model to examine the cost of capital to a company, The writer explains both the models, why they are different and their weaknesses. The bibliography cites 6 sources.
Page Count:
7 pages (~225 words per page)
File: TS14_TExerox3.rtf
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Unformatted sample text from the term paper:
are several different methods of conduction this type of calculation. The most common are the weighted cost of capital and the capital-asset pricing model. If we look at a company
we can demonstrate how these models work and then consider what y there may be differences in the results that they produce. If we consider the well known company Xerox
we can use these two methods of calculation the cost of the capital on the same example. Weighted Average Cost of Capital. This is a calculation of
an average cost of the underlying cost capital calculated proportionately with reference to the different forms of capital and their cost to the company. The calculation is made up of
two components, the cost of the debt and the cost of the equity. The different forms of capital are weighted according to their representation in the capital structure.
First we need to calculate the cost of the debt. In the Xerox annual accounts we are given these figures already as 5.5% for
2001, 6.2% for 2000, and 5.7% for 1999 (Xerox, 2001). However, so the student understand how these figures have been reached we will use a simple example of the calculation
of weighted average cost of debt (Xerox, 2001). This can then be applied to the Xerox case. If we assume that a
company only has 3 loans, one at 5%, one at 7% and one at 10%, each loan is then taken proportion, and the interest rates reduced to the proportion, then
the resulting proportional rates are added together. The table below is an example. In the annual accounts of Xerox there is a full-page of different debts with the rates
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