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Complete 5 page APA formatted essay: Finance and accounting.The WACC reflects the aggregate cost to the financial institution with regard to the company. It is the value that represents the total retu
Complete 5 page APA formatted essay: Finance and accounting.
The WACC reflects the aggregate cost to the financial institution with regard to the company. It is the value that represents the total return that is required by equity or debt holders against the investment in the firm. The risk free-rate is the interest rate charged on the treasury bonds to reflect the bonds of the government as the price that is risk-free. The beta of the firm measures the risk of the stock and was taken based on the average of the industry. The average beta factor that is used is 0.78. The additional information that facilitated the qualification include the working capital averagely 28.1%, the risk-free interest 4.25% respect to a tax shield of 40% and cost of equity 7.79%. The above information facilitated the computation of WACC which in this case is 8.33% in the excel file.
Cash flows are computed by EBIT (1-Tax rate) + Depreciation – Net working capital. We shall consider using the average present value so the Future Cash flows are discounted by using equity cost of capital. For discounting the terminal value, the WACC is used considering that after 5 years, the company leverage ratio will be constant and in conforming with the competitors in the industry.
The present value of equity affiliates is computed by multiplying it with the average price to Earnings ratio. The un-levered cost of capital for computation of the firm is 7.37%.
Because dividend to earnings ratio is changing from one year to the other, the adjusted present value is the best method for valuation of the firm.
