--%>
Assignment Help - homework help

In which cases use different WACCs

Is this possible to use different WACCs within order to discount each year’s flows? In which cases?

E

Expert

Verified

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.

   Related Questions in Corporate Finance

  • Q : Finance You expect KT industries (KTI)

    You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is clos

    		•
  • Q : Define capital goods Capital goods :

    Capital goods: Goods employed in producing other goods are termed as capital goods.

    		•
  • Q : Explain undervaluation of share on the

    Suppose we calculate g as ROE (1–p)/(1–ROE (1–p)) and the Ke by the CAPM. We replace both values into the formula PER = (ROE (1+g) – g)/ROE (Ke-g) but there PER we obtain is fully different from the one we get by dividing the quotation of the s

    		•
  • Q : Do expected equity flows coincide with

    Do expected equity flows coincide along with expected dividends?

    		•
  • Q : Standard deviation of portfolios returns

    Assume that you have $50,000 which you want to invest in two companies, XYZ Books and ABC Audio. XYZ has a return of 10% and standard deviation 15%, while ABC has return of 15% with a standard deviation of 20%. The correlation coefficient between them is .5. Your port

    		•
  • Q : Liquidity Ratios Liquidity Ratios :

    Liquidity Ratios: Such ratios comprise the Current Ratio and the Quick Ratio or the acid test ratio. Liquidity ratios demonstrate the Liquid position of a company in the short term that is the capability of a firm to pay its obligations in short term.

    		•
  • Q : Set of conflicts in reducing working

    Give an illustration of a set of conflicts encountered when attempting to reduce working capital?

    		•
  • Q : Regarding WACC Regarding the WACC which

    Regarding the WACC which has to be applied to a project, must it be an expected return, the average historical return or an opportunity cost on similar projects?

    		•
  • Q : Cost of Equity AB Corporation has 16%

    AB Corporation has 16% cost of equity, 35% tax rate, and debt-to-equity ratio of 30%. XY Corporation has 30% tax rate and debt-to-equity ratio of 40%. Both AB and XY are in the same business of selling automotive parts. If the riskless rate is 4% and the expected retu

    		•
  • Q : Overview of capital market efficiency

    Provide a brief overview of Capital Market Efficiency?

    		•