April 2014
Intermediate to advanced
1344 pages
44h 24m
English
book
Cost of Capital: Applications and Examples, + Website, 5th Edition
by Shannon P. Pratt, Roger J. Grabowski, Richard Brealey
Content preview from Cost of Capital: Applications and Examples, + Website, 5th Edition
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CHAPTER 21
Weighted Average Cost of Capital1
Valuing the Levered Business Enterprise
Debt Capacity and Optimal Capital Structure
Computing WACC for a Public Company
Computing WACC for a Nonpublic Company
Should an Actual or a Hypothetical Capital Structure Be Used?
Should a Constant or Variable Capital Structure Be Used?
Fixed Book-Value Leverage Ratio
INTRODUCTION
In Chapter 20, we identified components of a company's capital structure. To estimate the weighted cost for all of the company's overall capital, we blend their costs together to derive the company's weighted average cost of capital (WACC), often called the overall cost of capital. In other words, we want to estimate the weighted cost for all of the company's invested capital. This requires a discussion of the appropriate amount of debt and equity in the capital structure and how much value, if any, the debt adds to the value of the providers of equity capital because of the interest tax shield that we discuss later in this chapter.
The most common assumptions made by analysts are that (1) the market value of debt capital equals its face value ...
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