Weighted Average Cost of Capital (WACC) Flashcards
What is the Objective of Management?
- Reduce Return on capital from shareholder or lenders
- Increase Return on Investments.
How many types Of Decisions
- Financing Decision
- Investing Decision
Is retained Profits taken as equity or not?
Yes Retain Profits are taken as Equity and same return rate of equity is applied on Retain Profits
How many types of Debts?
- Loan
- Loan from General Public
- Bank Overdrafts
Rate used while Calculation WACC on
1. Initial Capital
2. Retained Profits
Rate of Dividends to be paid to Shareholders
Rate used while Calculation WACC on
1. Loan
2. Overdraft
3. Debenture
Rate of Interest to be paid to Lenders
What is the Correct List Avenues of Investment?
- Government Bonds
- AAA Rated Bonds
- AA Rated Bonds
- Investment Grade Bonds
- Junk Bonds
- Defaulted Bonds
- Blue Chip Securities
- Small Cap Securities
Names OF Credit Rating Agencies in Pakistan?
- PACRA
- JCRVIS
While Calculating WACC which return in used
1. Annual Return
2. Holding Period yield
Annual Return
How to Calculate Annual Return when Holding Period Yield is given?
(return/month of returns )* 12
Symbol Of Cost of Equity
Ke
Symbol Of Cost of Debt
Kd
What is Capital Employed
Equity + Long Term Debt
What is Working Capital
Current Asset - Current Laibilty
OR
Fixed Asset + Capital Employed
Formula Of WACC
(LTD* Kd + Equity * Ke) / LTD + Equity
While Calculating WACC which Value of Equity and Debts are taken
1. Historical value
2. Market value
Market Value
What is Intrinsic Value?
maximum Value of asset or security to purchase depending upon returns
How to calculate Intrinsic value? (if Return is till Infinity)
(Return/ required rate(Ke)) = Intrinsic Value
(Perpetuity Formula is used)
How to calculate Intrinsic value? (If returns are received for few Years)
Return* {(1-(1+i)^r) / i}
(Present value of future cashflows of an asset)
Profit=
Asset * ROE
Is profits are equal to Dividends
Yes
on which Value Company always earns returns
1. Book value
2. market value
Book Values of an asset or Shares
Market Value of shares
when Company policy is 100% payout of dividends
dividend / Ke
What is formula for Ke when Company policy is 100% payout of dividends
Dividend / Market Value of Share
Growth rate Through Historic Dividend Method
1st Dividend*(1+ g) = Last Dividend
(Where g is Growth)
Growth Rate Through Gorden’s Method
g=b*r
(where b= Retaintion Ratio
r = Return of Equity
Formula Used is Calculation of Present Value of Growing Perpetuity
PV= {Dividend * (1 + g)} / (Ke - g)
(Where g is Growth Rate)
By default which method is used to calculate Growth rate
1. Historical Dividend method
2. Gordan’s Method
- Historical Dividend method
how many types of dividend payout?
There are three Types of Payouts
1. constant 100% Payout
2. Constantly Growing Dividends
3, Super normal Growth model
Market Value =
E/P ratio * EPS
Dividend Yields Ratio=
dividends/Market value of share
Ke=
{Dividend(1+g)}/(Market value) + g
when Ke= Dy
when company payout is 100% (profit = dividends)
Payout % =
PE Ratio * Dividend Yields
Retaintion Ratio =
1- Payout %
In Super normal Growth in dividends Market value is calculated as
PV Of Terminal Value + PV of Supernormal growth (remaining Values)
Which rate is used for calculation of PV in Super Normal Method?
Ke
What is terminal Value?
The value from which the super growth is converted to the normal growth.
