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Essay / Research Paper Abstract
This 4 page paper looks at two financial measures; weighted average cost of capital (WACC) and the asset beta. Each is defined and their use is discussed, the paper ends by looking at the relationship between the two measures. The bibliography cites 3 sources.
Page Count:
4 pages (~225 words per page)
File: TS65_TEassetbeta.doc
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Unformatted sample text from the term paper:
number of approaches; one is to undertake an assessment using a discount model to discount future cash flows into todays value. Two measures which may be used within this process
are the WACC and the asset beta; to appreciate the link between these two measures it is necessary to look at each measure, what they are and how they may
be used. The concept of the weighted average cost of capital is design to reflect the overall cost of capital in the firm by assessing the cost of the
different sources of capital and apportioning them to give an overall cost. There are two sources of capital; debt and equity. The weighted average cost of capital is obtained
by calculating the cost for each of these different forms of capital and bringing them together. In both cases; equity and debt, the actual rate being paid by the company
will reflect the perceived risk to the lenders all the investors; the risk premium. Theoretically, the mix of equity and debt which makes of the total capital should not impact
on the overall rate paid when this is considered under the equity arbitrage theory of Modigliani and Miller (1958). The basic theory is that where there are not costs of
taxes, bankruptcy and in an environment where there is no asymmetric information and the market is efficient the value of a company will not reflect the capital structure or the
companys dividend policy. In theory where there are two companies (U) an unleveraged company and (L) a leveraged company, both will have the same value where they are the same
expect for the capital structure. This can be examined by looking at the two propositions. The first proposition states VU = VL , with this VU is the value
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