Weighted Average Cost of Capital

WACC Weighted average cost of capital =WACC= SS+B? Rs+BS+B? RB? 1-tC note Rs , cost of equity RB , cost of debt tC , corporate tax rate. For cost of equity, Rs, we calculate it by using the SML, according to CAPM model. Rs=RF+ RM-RF As we can see in the chart behind the case, genus Beta of Worldwide Paper Company is 1. 10 the Market risk premium (RM-RF) is 6. 0%. Because this on-site longwood woodyard project has six year life and the investment funds glide by over two years, the total long of this program is more closer to 10-years, we choose the 10-year government activity bonds as risk free rate, 4. 60%.Thus, Rs=4. 60%+1. 10? 6. 0% =11. 20%. For the cost of debt, there be two kinds of debts of Worldwide Paper Company, trust loan and long-term debt. The cost of long-term debt is 5. 78% (A rank 10-years maturities corporate bonds) , and the measure out of long term debt is $2500M. Thus, RB=5. 78%. For the value of equity and debt, trade value weights are more appropriate than book value weights, because the market values of the securities are closer to the actual dollars that would be received from their sale. There are the market weights expected to prevail over the life of the dissipated or the project.S=500? $24. 00=$12,000M B=$2500 RWACC=1200012000+3000? 11. 20%+300012000+3000? 5. 88%=9. 76% Payback Period course of instruction 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 2. 08 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 Cumulative CF -16 -15. 52 -11. 62 -7. 12 -2. 62 1. 88 8. 46 Thus, the payback diaphragm is 4+2. 624. 5=4. 58 year. Discounted Payback Period YEAR 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 0 0 0 2. 08 discounted CF of investment -16 -2. 18 -0. 0 0 0 0 1. 18 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 discounted OCF 2. 62 3. 73 3. 39 3. 09 2. 81 2. 56 sum -16 0. 44 3. 23 3. 39 3. 09 2. 81 3. 74 Cumulative CF -16 -15. 56 -12. 33 -8. 94 -5. 85 -3. 04 0. 70 Thus, the discounted payback period is 5+3. 044. 5=5. 81 year. Average Accounting regularity YEAR 2007 2008 2009 2010 2011 2012 2013 average lettuce income -0. 12 1. 5 1. 5 1. 5 1. 5 1. 5 1. 23 investment 16 15. 4 13 10 7 4 0 9. 34 Thus, AAR=Average net incomeAverage investment=1. 239. 34=13. 16%Weighted Average Cost of CapitalWACC Weighted average cost of capital =WACC= SS+B? Rs+BS+B? RB? 1-tC note Rs , cost of equity RB , cost of debt tC , corporate tax rate. For cost of equity, Rs, we calculate it by using the SML, according to CAPM model. Rs=RF+ RM-RF As we can see in the chart behind the case, beta of Worldwide Paper Company is 1. 10 the Market risk premium (RM-RF) is 6. 0%. Because this on-site longwood woodyard project has six year life and the investment spend over two years, the total long of this program is more closer to 10-years, we choose the 10-year government bonds as risk free rate, 4. 60%.Thus, Rs=4. 60%+1. 10? 6. 0% =11. 20%. For the cost of debt, there are two kinds of debts of Worldwide P aper Company, bank loan and long-term debt. The cost of long-term debt is 5. 78% (A rating 10-years maturities corporate bonds) , and the value of long term debt is $2500M. Thus, RB=5. 78%. For the value of equity and debt, market value weights are more appropriate than book value weights, because the market values of the securities are closer to the actual dollars that would be received from their sale. There are the market weights expected to prevail over the life of the firm or the project.S=500? $24. 00=$12,000M B=$2500 RWACC=1200012000+3000? 11. 20%+300012000+3000? 5. 88%=9. 76% Payback Period YEAR 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 2. 08 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 Cumulative CF -16 -15. 52 -11. 62 -7. 12 -2. 62 1. 88 8. 46 Thus, the payback period is 4+2. 624. 5=4. 58 year. Discounted Payback Period YEAR 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 0 0 0 2. 08 discounted CF of investment -16 -2. 18 -0. 0 0 0 0 1. 18 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 discounted OCF 2. 62 3. 73 3. 39 3. 09 2. 81 2. 56 sum -16 0. 44 3. 23 3. 39 3. 09 2. 81 3. 74 Cumulative CF -16 -15. 56 -12. 33 -8. 94 -5. 85 -3. 04 0. 70 Thus, the discounted payback period is 5+3. 044. 5=5. 81 year. Average Accounting Method YEAR 2007 2008 2009 2010 2011 2012 2013 average net income -0. 12 1. 5 1. 5 1. 5 1. 5 1. 5 1. 23 investment 16 15. 4 13 10 7 4 0 9. 34 Thus, AAR=Average net incomeAverage investment=1. 239. 34=13. 16%