In which cases use different WACCs
Is this possible to use different WACCs within order to discount each year’s flows? In which cases?
Expert
Yes, this is possible. The WACC can only be constant while a constant debt is expected. When debt changes from one year to the next, therefore the WACC also changes from one year to the next, as per to the formula:
WACCt = [Et-1 Ket + Dt-1 Kdt (1–T)] / [Et-1 + Dt-1]
Ke is the required return to equity, Kd is the cost of debt and T is the effective rate of income tax. Et-1 and Dt-1 are the values of the shares and the debt that are acquired in the valuation. Such formula for WACC means that the value of the debt coincides along with its book value.
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ABC Corp is issuing a 10-year bond with a coupon rate of 7 %. The interest rate for similar bonds is at present 9 %. Supposing annual payments, what is the current value of the bond? (Round to the closest dollar.) (a) $872 (b) $1,066 (c) $990 (d) $945. Discover Q & A Leading Solution Library Avail More Than 1448974 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads No hassle, Instant Access Start Discovering 18,76,764 1944980 Asked 3,689 Active Tutors 1448974 Questions Answered Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!! Submit Assignment
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