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Weighted Average Cost of Capital (WACC) - Assignment

   

Added on  2020-05-11

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Finance
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AVEO GROUP 1AVEO COMPANYNameProfessorInstitutionCourseDate
Weighted Average Cost of Capital (WACC) - Assignment_1

AVEO GROUP 2Weighted average cost of capital (WACC) depicts a company’s financial position in[ CITATION mil12 \l 1033 ]consideration to its ability to finance innovative projects or otherpayments by raising cash from external sources. These sources appear in two main classes:stocks and bonds. The two have distinct costs to the firm, and WACC is a subjective average ofthe entire price of getting funds via debit and equity.Suggestion of Aveo group WACCRecent research shows a considerable decrease in cumulative percentage of Aveo groupWeighted Average Cost of Capital. According to 2016 statistics the group WACC was recordedto have declined to a percentage of 3.4.The decline brought about several suggestions to thefinancial analysts. Briefly, the suggestions attempt to explain the reasons which might have ledto this considerable decline[ CITATION Pri13 \l 1033 ].The company might have lowered the price of issuing equityPrice of equity basically is used by financial analysts to refer to the stockholders requiredreturn rate on the company equity investment. It similarly depicts the return rate that would havebeen realized by investing the cash in a different venture with an equivalent risk level.Price of equity is a crucial factor of stock analysis. An investor will always expect anequity share to propagate by at least the price of equity; price of equity is commonly used asconcession rate to compute an equity venture’s fair price. Considering the Aveo group scenario,lowering the terms of issuing equity will attract investors and this might have been the reasonbehind the decline in the average WACC[ CITATION Ard14 \l 1033 ].The company might have reduced the price of debt
Weighted Average Cost of Capital (WACC) - Assignment_2

AVEO GROUP 3Price of debt basically denotes the rate at which a company recompenses its current debt.In most cases, it is used to refer to the after-tax price of debt; it can also denote to a firm’s priceof debt before putting taxes into consideration. This measure is essential for giving a notch onthe overall rate in the process of payment by a company using debt financing. The measure givesinvestors an insight on the company risk in comparison to the others; riskier companies usuallyhave a greater cost of debt. Lowering the price of debt by the Aveo group might have attractedpotential investors and hence reducing the WACC[ CITATION Ard15 \l 1033 ]. The WACC is settled through intricate calculations and conventions about the differenttypes of capital (debt and equity) used by Aveo group to fund its operations. Costs are restrainedagainst approximate risk elements. Greater subsidy costs and greater risks create a greaterWACC. A lesser WACC increases incomes because the company can borrow cheaply[ CITATIONBru11 \l 1033 ].Calculating the WACCThe formula is: WACC=E/(E + D)*Cost of Equity+D/(E + D)*Cost of Debt*(1 - Tax Rate)WeightsCompany’s possessions are funded by both debts and equity. For that reason, incalculating the company’s WACC the burden of equity and the burden of debt must beconsidered first. The equity market value of Aveo group also known as the Market Cap has beenrecorded as $M 1,388.The value of debt in the market typically being hard to compute, this paper
Weighted Average Cost of Capital (WACC) - Assignment_3

AVEO GROUP 4uses the book figures of debt to carry out the calculations. According to the book value$0[ CITATION Bou13 \l 1033 ].a)Weight of equity = E / (E + D) = 1,388 / (1,388 + 0) = 1b) weight of debit = D / (E + D) = 0 / (1,388} + 0) = 0 Price of Equity:This paper makes use of CAPM (Capital Asset Pricing Model) model to compute the required return rate. The formula used is: price of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return) [ CITATION Lin13 \l 1033 ]a) The paper evaluates a 10-Year Reserves Perpetual Maturity Rate as the risk-free rate. The current risk-free rate of Aveo group is 2.41000000%b) Beta refers to the volatility of the anticipated surplus asset paybacks to the anticipated surplus market paybacks. Aveo group beta is 3.15c). This paper considers the market premium of Aveo group to be 20%.Price of Equity = 2.41000000%+ 3.15 * 20% = 63.241% The Price of Debt:The research uses last fiscal year end expenses on interest and divide them by the two year average debt to attain a simplified cost of debt; Cost of Debt = 0 / 0 = %. Multiply by one minus Average Tax Rate:The paper makes use of the current 2-year tax rate for computation.The current 2-year Average Rate of Tax is 0%
Weighted Average Cost of Capital (WACC) - Assignment_4

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