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Weighted Average Cost of Capital
Week 7 reading:
In this week, you need to finish the reading of case15:
Summary of case 15:
This case is intended to serve as an introduction to the calculation of the weighted average cost of capital (WACC) of the firm.
The case provides a WACC calculation that contains errors based on conceptual misunderstandings.
Your task is to identify and explain the mistakes in the analysis. The case assumes that are exposed to the WACC, CAPM, the dividend discount model, and the earnings capitalization model.
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Knowledge of this case:
- the calculation of WACC:
WACC = Kd(1 − t) × D/(D + E) + Ke × E/(D + E); where E= equity and D= debt, and t = the tax rate
- calculation of Kd (cost of debt) for bond
- calculation of Ke (cost of Equity):
two methods: CAPM and DDM.
- WACC requires use market value rather than book value to calculate the weights.
Please read the case 15 and the case reading instruction file and answer the following questions
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Assignment of case 15
- What was your estimate of WACC?
Please submit an excel work.
- What mistakes did Joanna Cohen make in her analysis? Which method is best for calculating the cost of equity?
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