question archive BUS 401 Week 5 Discussion Forum 1 Cost of Capital In the constant growth formula, you can use the required rate of return on equity to determine the value of a share of stock
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BUS 401 Week 5 Discussion Forum 1
Cost of Capital
In the constant growth formula, you can use the required rate of return on equity to determine the value of a share of stock. However, when you are computing the value of an investment project, you cannot assume the project is entirely funded by equity. Most businesses, and most projects, are funded with a combination of debt and equity financing. As a result, the discount rate for the project has to reflect the required rates of return for the debt holders and the equity holders. Analysts compute the weighted average cost of capital (the WACC) to value projects. The WACC is a weighted average of the required returns for the debt and equity holders, based on the proportions of debt and equity in the capital structure. In this discussion, you will practice calculating the WACC and interpreting its meaning and application.
Prepare:
Prior to beginning work on this discussion forum,
Imagine that you own a company, Optimus, Inc., which is funded with 40% debt and 60% common stock; there is no preferred stock in the capital structure. The debt has an after-tax cost of 4%. You have studied the Electrobicycle project, and you believe that the auto company who has done the research and development (R&D) has made a crucial mistake. You believe that after the first 5 years, there will be worldwide expansion opportunities and many more years of revenues and earnings from selling Electrobicycles. Thus, you would not shut down the project in Year 5. Instead, you believe you will be able to sell the Electrobicycle business in Year 5 to a multinational company that will continue to produce the products and sell them internationally for many years into the future. You believe the sale of the Electrobicycle business in Year 5 will be for at least $15.0 million. Thus, you believe the value of the Electrobicycle project is significantly higher than the auto company realizes.
For the initial post,
First Letter of First Name |
Beta |
A through B |
0.30 |
C through D |
0.40 |
E through F |
0.50 |
G through H |
0.60 |
I through J |
0.70 |
K through L |
0.80 |
M through N |
0.90 |
O through P |
1.00 |
Q through R |
1.10 |
S through T |
1.20 |
U through V |
1.30 |
W through Z |
1.40 |
Guided Response: Review several of your colleagues’ posts, and reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. You must respond to two classmates who have completed different calculations than you. In your written responses to your classmates, do the following: