Chapter 8 - Capital Structure & Cost of Capital

Question 1

What is the formula to calculate the WACC?

Answer 1

WACC=D/(D+E)∗i+E/(D+E)∗k

Question 2

What is the formula to calculate WACC with tax?

Answer 2

WACC(taxes)=D/(D+E)∗i(1−T)+E/(D+E)∗k

Question 3

What is the optimal capital structure of a company?

Answer 3

When WACC is smallest, as this will make the highest value of the company

Question 4

How do you calculate the value of a company with leverage?

Two ways:

1. Unlevered value
2. FCF

Answer 4

Vl=Vu+(T∗D)

Vl=FCF/WACCl

Question 5

How can you find the cost of equity through the leverage relation?

Answer 5

k= e+(e−i)∗(1−T)∗D/E

Question 6

How can you find the value of operating assets?

Answer 6

Vl=FCF/WACC

Question 7

What does arbitrage mean?

Answer 7

The opportunity to earn money for free

Can be calculated like:

percentage owned of levered company * value(levered)/value(unlevered)