Weighted Average Cost Of Capital Coursework Example

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Category:
Economics
Level:
University
Type:
A-Level
Pages:
2
Words:
550
Student’s nameProfessor’s name Course Date Weighted Average Cost of Capital During decision making concerning investment, it is very important and useful to understand the weighted average cost of capital. It is a key financial tool for companies and investors. It helps the investors to either invest or continue with their project. The weighted average cost of capital is utilized by financial analysts to determine the net present value a company may earn. The investors also use the weighted average cost of capital to determine the value of the company and to know the future cash flow. They do these by taking the weighted average cost of capital and divide by the number of shareholders equity and finds the companies per share value. The companies per share value enable them to invest wisely (lecturer’s last name). Calculation of the Company’s weighted average cost of capital using the dividend discount model Weighted average cost of capital= Weight of debt * Cost of debt * Weight of equity * Cost of equity (lecturer’s last name). Calculating the Cost of equity capital using the Dividend Discount Model Cost of equity capital= (Expected dividend per share/Price per share of stock) = (2.50/50) + 0.04 = 0.05 +0.04 = 0.09 or 9% The cost of debt= 6 * (1-0.35) = 6 * 0.65=3.90% Weight of debt = 0.40 Weight of equity = 0.60 Weighted average cost of capital = 0.40 * 3.90 + 0.60 * 9 = 1.56 + 5.40 = 6.96% Let us check the impact of change in the capital structure of the company Debt is given as 60% and equity 40% in the question. Therefore the weight of debt is 0.60 and weight of equity are 0.40. The new weighted average cost of capital = weight of debt * cost of debt + weight of equity * cost of equity = 0.60 * 3.90 + 0.40 * 9 = 2.34 + 3.60 = 5.94 %. From the calculations above, weighted average cost of capital when debt is 40% and equity at 60% is 6.96% The weighted average cost of capital when debt is at 60% and equity at 40% is 5.94% I...
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