WACC Flashcards
do you use market values or book values for weighting of equities
market values
how to get the market value of debt
multiply bond price by the amount borrowed
are interest payments considered a business expense
yes
are dividends considered a business expense
no
are interest payments tax deductable
yes
are dividend payments tax deductable
no
why is debt cheaper than equity
its less risky
how is debt less risky than equity
lower risk investments - debt is the first thing to get paid back
as tax rate rises what happens to WACC
declines
as tax rate declines what happenes to WACC
rises
when is the WACC used by investors
valuing an entire firm
when is the WACC used by firms
to use as hurdle rate and disoucnt rate in capital budgeting
expected rate of return demanded by investors
if debt is so cheap why do firms not finance themselves fully through debt
no one will lend to them
people who do lend may rather want a stake in the company as the value of a share has more potential
increased leverage means increased risk - easier to reach bankrupcy
if a firm is 100% financed by equity, is it likely to go bannkrupt
it cannot
if a firm has a more volatile market eg a startup, should they have increased or decreased leverage
decreased
need a big equity buffer
if a firm is quite stable should they have increased or decreased leverage
can allow for more if their cashflows are constant
what is the company cost of capital
expected rate of return demanded by investors of the compan
what is the project cost of capital
the minimum acceptable expected rate of return on a project given its risk
WACC can only be used when the project has the same risk as …
the existing business
if the project does not have the same risk as the exisiting business then the WACC is used as ..
the bench mark
what are free cash flosw to the firm
cash flows not required for investment so is available to bondholder and stockholders
what model is used to value a firm using wacc
disocunted cashflow model
