Question

In: Finance

Do we need to know the cost of equity to calculate the WACC?

Do we need to know the cost of equity to calculate the WACC?

Solutions

Expert Solution

answer :-

yes we need to know the cost of equity to calculate the weighted average cost of capital(WACC ).

explanations :

first we see the definition of WACC:- WACC is the cost of capital of the entity, in which each category of capital is proportionatly weighted , all sources of capital including equity stock, preffered stock, bonds, and any other long term debt are included in WACC calculation.

formula of WACC calulation : E/V*Re +D/V*Rd*(1-Tc)

here:

Re = cost of equity

Rd= cost of debt

E = market value of entity equty

D= market value of entity debt

V=E+D=Total market value of the entity financing

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc= corporate tax

since from the definition and formula we can understand that cost of equity need to know to calculate the cost of capital.

senario 1 :suppose a entity is having only equity stock in its capital structure , WACC of that entity is equals to the cost of quity

senarios 2 : suppose a entity is having quity and debt in its capital structure , WACC is average of cost of equity and cost of debt( after tax for debt only )

so form the above discussion we can understand that cost of capital is the one of the main component in calculation of WACC, so we need to know the cost of equity in the calculation of WACC


Related Solutions

Calculate the Hurdle rate /WACC for HCL Technologies Calculate the cost of equity capital: 1. Take...
Calculate the Hurdle rate /WACC for HCL Technologies Calculate the cost of equity capital: 1. Take historical monthly adjusted closing prices for the company from yahoo finance for 3-5 years 2. Calculate the monthly returns Ln(Pt/Pt-1) 3. Take historical monthly adjusted closing prices for market index and calculate monthly returns 4. Run a regression with dependent variable as target company monthly returns and independent variable as market returns 5. The beta (coefficient of market return) is the beta levered for...
What is cost of capital? How do you calculate WACC?
What is cost of capital? How do you calculate WACC?
Given the following, calculate WACC for company XYZ: Debt: $1,000M Equity: $1,000M Cost on Debt: 7.0%...
Given the following, calculate WACC for company XYZ: Debt: $1,000M Equity: $1,000M Cost on Debt: 7.0% Cost on Equity: 10.0% Tax Rate: 35.0% Based on the following information about Company X, which is true? A/P Turnover: 24 Total Asset Turnover: 9 Days Payable Outstanding: 12 Times Interest Earned: 15 Debt/Equity: .7 Company X generates $9 in sales per dollar invested in assets Company X has less equity than debt Company X pays bills in 24 days Company X pays interest...
With the wide spread use of computers, do we need to know debits and credits?
With the wide spread use of computers, do we need to know debits and credits?
Why do we need carbohydrates and how much do you know about carbohydrates and how they...
Why do we need carbohydrates and how much do you know about carbohydrates and how they contribute to energy in your body.
Use the information below to determine the firms cost of debt, cost of equity, and WACC....
Use the information below to determine the firms cost of debt, cost of equity, and WACC. Use market values to determine the weights. - The expected return on the market portfolio is 11% and the risk-free rate is 3%. The firm’s beta is 1.6. - The firm has most recently paid a dividend of $2. Dividends are expected to grow at a rate of 3% per year, indefinitely. - The firm has 1.5 million shares of common stock outstanding. The...
Use the information below to determine the firms cost of debt, cost of equity, and WACC....
Use the information below to determine the firms cost of debt, cost of equity, and WACC. Use market values to determine the weights. ? The expected return on the market portfolio is 11% and the risk-free rate is 3%. The firm’s beta is 1.6. ? The firm has most recently paid a dividend of $2. Dividends are expected to grow at a rate of 3% per year, indefinitely. ? The firm has 1.5 million shares of common stock outstanding. ?...
why do we need to calculate the cpi and what is the basket of consumers good...
why do we need to calculate the cpi and what is the basket of consumers good and services?
To calculate BMEP (Break mean effective pressure), what factors do i need to know?
To calculate BMEP (Break mean effective pressure), what factors do i need to know?
Use the information below to determine the firms cost of debt, cost of equity, and WACC.  Use...
Use the information below to determine the firms cost of debt, cost of equity, and WACC.  Use market values to determine the weights. - The expected return on the market portfolio is 11% and the risk-free rate is 3%.  The firm’s beta is 1.6. - The firm has most recently paid a dividend of $2. Dividends are expected to grow at a rate of 3% per year, indefinitely. - The firm has 1.5 million shares of common stock outstanding. The firm has...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT