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## Problems with Calculating WACC

The weighted average cost of capital (WACC) is the cost of capital a company expects to pay to all its stakeholders including equity and debt-holders. First we calculate the marginal cost of capital for each source of capital such as equity and debt, and then take the weighted average of these costs. While calculating the

## Cost of Capital in Emerging Markets

Cost of Equity CAPM can be used to estimate the cost of equity capital for an emerging market. Note however, if the country is not very well integrated into the global capital market system, then CAPM may be an unsuitable technique, so be mindful of this qualifier when reading the item set. Start by creating

## Equity Risk Premium (ERP) and Required Return on Equity

The ERP is the amount of return required by an investor above and beyond the risk free rate, where the risk free rate is commonly the rate of return from a sovereign government bond with a maturity comparable to the investor’s time horizon. Historical Estimates for ERP: this approach calculates the ERP based on historical

## Evaluating Capital Structure Policy

Analysts can compare a company’s capital structure to that of its primary competitors. Analysts can also compare a company’s current capital structure to its historical capital structure. If a company is trending toward higher financial leverage, this may signal future bankruptcy. Company management may never publicly state its target capital structure, but the analyst knows

## Flotation Costs and WACC

While raising new capital, a company incurs cost, which is paid as a fee to the investment bankers. This fee is referred to as the flotation cost. The amount of fee depends on the size and type of offering. Flotation cost is generally less for debt and preferred issues, and most analysts ignore it while

## Applications of Cost of Capital

The marginal cost of capital plays an important role in capital budgeting and investment decisions. As a firm raises more and more capital, it’s marginal cost of capital (MCC) increases. However, when a firm makes more investments, the returns from additional investments decrease. This is represented by the investment opportunity schedule (IOS). The MCC schedule

## Weighted Average Cost of Capital (WACC) – Practical Example and Issues

In the previous article we review the concept of weighted average cost of capital and its formula. This video provides a detailed example of WACC calculation and also discusses some of the issues while using it. The video also discusses in detail the concept of marginal cost and why a firm can’t finance itself only

## Weighted Average Cost of Capital (WACC)

The cost of capital is the rate of return that a firm pays to bondholders and equity holders. Cost of capital is an important measure while making investment decisions, as any one making an investment would expect a higher return from his investment in a company compared to what he could earn from an alternative

## Value of a Firm (Using Operating Free Cash Flows)

The value of the firm is measured as the sum of the value of the firm’s equity and the value of the debt. Any firm’s objective is to maximize its value for the shareholders. The value of the firm can be measured as the present value of the operating free cash flows over time. The