The Weighted Average Cost of Capital Method (Week 10) Flashcards
1
Q
What is the target leverage ratio?
A
D/V = constant
IF V goes up in the future, the firm will need to borrow more; if V goes down, the firm will need to pay down debt.
2
Q
What happens to tax shields if D fluctuates?
A
They also fluctuate
3
Q
How do you estimate interest tax shields?
A
- Calculate the (after-tax) weighted average cost of capital (WACC)
- Discount all FCFs with the WACC
4
Q
What happens to WACC if the leverage ratio is not stable over time?
A
WACC will also vary over time.
WACC method does not work well when the capital structure is expected to vary substantially over time.
5
Q
What is the formula for “unlevering” equity betas?
A
6
Q
What is the equation for “relevering” asset betas?
A
7
Q
Equation for the terminal value of WACC
A
8
Q
Equation for the PV of the TV of WACC - PV(TV)
A
