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Essay / Research Paper Abstract
This 3 page paper is based on a case study supplied by the student in which a weighted average cost of capital calculation has been performed. The paper assesses the way the calculation takes place, suggests some improvements and presents a new WACC calculation.
Page Count:
3 pages (~225 words per page)
File: TS14_TEWACCass.rtf
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Unformatted sample text from the term paper:
of equity and the cost of debt. There are a number of ways of assessing this, although the calculation are correct there are some relevant factors that should be taken
into account when looking at the way that the calculations have been performed. It may be argued that when the WACC is needed
for a forthcoming project it is the current cost of capital that is important, and not the historical cost. The consultant in the case has undertaken a calculation that uses
a range of historical data. However, this is a figure that is not correct at any point it time, and gives an average cost of capital for the past.
This is not wrong, but if looking at making investments, making estimates and undertaking calculations based on historical rather than forward looking data
can be misleading and the current rates will be different. From the calculation where the new level of debt is included it is apparent that there is a need to
look at an accurate cost of capital for the future to help in the assessment of the plans. The difficulty with any calculation is that there are a number
of choices to be made, all of which may be correct. The first consideration may be the cost of the debt. There are debentures at 5%, the current trading value
is of no consequence, although the firm could choose to buy back at this rate and pay them offer and issue new debentures, but this is impractical. However we will
assume that these will be held and paid at the 5%. However, there needs to be an adjustment made for tax. The consultant has used the average for the
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