Write Reflective essay about weighted average cost of capital (1000 words)
Use some of the prompts for the journal posts above to write a reflective essay. Find practical information on some of the variables used in the calculation of the WACC and evaluate their relevance for a calculation of the WACC. For example, you might choose a company of interest and decide:
What weights should we use when calculating the WACC, market value weights or accounting book values. To do this find the market value of equity (no. of shares times the share price) and the market value of financial debt (if no traded debt you may need to use accounting book values) then compare the weight calculations with those calculated using book values (shareholder funds plus total financial debt). Do they differ and what would you use
What risk free rate would you use – 30 day, 3 month, 6 month 1 year, 3 year, 10 year, of 30 year? Would it make a difference?
Should you use a published beta such as that available on the Morning Star Data Base (DatAnalysis in the Library), calculate the beta yourself (you can get share prices and market indexes from Yahoo Finance), or pay someone to do it for you
Do you calculate a return on the market or use the spread between the market and the risk free rate (6% to 8% premium according to research).
Do you use the debt expense as per the accounts or some indicator rate?