WACC Case Study

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The purpose of this study is to differentiate what WACC stands for, what it represents and how it influences management to make decisions. The study seeks answer the research question, Are WACC and ENPV are conected and if so explain everything connected to their interdependence? The goal is to use current knowledge and new discoveries in the field to proove if there is interconnection between these two and to explain how companies can use WACC and ENPV to be more profitable. The WACC stands for Weighted Average Cost of Capital. It is the measure of the average cost of capital a firm is paying for it's debt. It is very important in calculations because a firm needs to achieve greater number that WACC number in order…show more content…
Also, Pablo Fernandez (2010) states that it is not a cost nor a required return, but a average cost of required return. This means that for the company WACC is not just a cost or required return they need to have in order to be break-even or profitable, it represents average of those two, because it can be higher and it can be lower in the real life. Pratt and Grabowski (2008) argue that WACC is used for project selection in capital budgeting. It is very important part of the capital budgeting process. Pratt and Grabowski (2008) also state that WACC has two sides: pretax and after tax. The valuation of the assets is different before and after the tax rate. Tax can be attached only to the debt financing part or loans taken from the bank. Since interest paid on debt reduces Net Income of the company, it also reduces the tax payments for the firm. The formula for calculation of WACC is: WACC = rD (1- Tc )*( D / V )+ rE *( E / V ) Where: Rd is the interest paid on debt 1-Tc is the after tax rate D represents the portion of money borrowed from…show more content…
Also, they pointed the graph that every firm should use in order to find their optimal WACC. Pratt and Grabowski ( 2008 ) state that the WACC should be found when dividing DEBT/ TOTAL CAPITAL and that represents for one company ideal and optimal WACC. Also, they state that WACC should be higher than the cost of debt but lower than cost of equity, rather it should be somewhere in the middle of these two, depending if the amounts of debt and equity are the same. The WACC calculation will give us the discount rate at the end. That rate represents how much we are on average paying interest for the money we have borrowed from various sources. Next, we use that rate for calculation of ENPV (Expected Net Present Value ) or rNPV (Risk-adjusted Net Present Value). The ENPV uses the rate which we fot calculating WACC and uses it to calculate the expected return on an investment. ENPV method consists out of possibilities for each scenario that we have. In beggining, we have Cash Flows for each of the scenarios, there should be minimum of three scenarios: best, normal and
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