Wacc Case
Autor: keyiy • August 10, 2015 • Research Paper • 287 Words (2 Pages) • 844 Views
1. Weight of Class A stock: 7590/ (7590+7156) =51.47%
Weight of Class B stock: 7156/ (7590+7156) =48.53%
Dividend=0.1*5.47%+0*48.53%=0.051472
Average Price= 2.125*51.47%+2.875*48.53%=2.49
Dividend/Price=0.02068
Average equity=0.5*(52459+52121)=52290
Net Income/ Average Equity=4309/52290=0.082406
(Equity-Dividend)/ Equity=0.6875
g=0.082406*0.6875=0.05665
Ke=0.02068+0.05665=0.07733
We=52459/84105=0.6237
Wd=31646/84105=0.3763
T=0.305
Kd=2329/15708=0.148268
Therefore, WACC=Wd*Kd*(1-t)+We*Ke=8.701%
2. Using WACC as a cutoff rate in evaluation of capital project is appropriate for this method takes into account the implicit and explicit costs of the different sources of funds and by using market value weights and nominal yields, this method considers all aspects of the firm, as well as the market issues. I don’t think the marginal cost of capital will be more appropriate, because it depends on the new debt issue caused by the acquisition which will not be ensure. Therefore, in my view points, it is better to use the WACC method.
3. The required rate of return=risk free rate+ beta*(market rate of return- risk free rate) =5.56%+0.8*(12.7%-5.56%) =11.272%. Therefore, the required rate of return is Best Food Inc. is 11.272%. In my opinion, I don’t think the required rate of return can be a proxy of the cost of capital. Because the required rate of return is calculated based on the market issues, it may ignore Best Food’s own situation somehow. Besides, I think required rate of return is people’s estimate for this company based on the market situation, it is only an estimate, not a real rate, so it maybe not very appropriate.
4. If the new company’s return excesses Best Food’s return, I think it may increase the higher risk associate with the higher return, but also bring some more opportunities. In my viewpoints, higher return always associates with higher risk, there is no project exists with high return and low risk, if so, everyone will go to focus on this project. Obviously, this kind of project never exists.
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