Minimizing Weighted Average Cost of Capital (WACC)

This assignment explores the concept of minimizing Weighted Average Cost of Capital (WACC) through debt, equity, and tax optimization. It also delves into the impact of WACC on market value and the difference between book value and market value of equity. The article concludes that abnormal earning valuation method is more accurate for certain companies.

Running head: ASSIGNMENT 1
Assignment
(Name of Student)
(Institutional Affiliation)
(Date of Submission)

Assignment 2
Best Ways of Minimizing the Weighted Average Cost of Capital (WACC)
Weighted Average capital cost refers to the combined rate at which any given entity needs to
repay its borrowed capital. One good method to minimize this cost is to reduce costs by issuing
debt, equity or even both which will in return, lower the interest rate offer to the investors of the
capital. This can also be channeled through a relatively higher rate of tax by giving out stocks of
low beta that will offer less of the premium risk and will not be riskier to the investors.
This cost can also be minimized by cutting down the cost of financing debt and reducing capital
restructuring and equity cost of the company. This means that a company can use its retained
earnings to finance its growth. The company can also utilize the optimal capital structure by
using the equity weights and debt weights into the structure of the capital that will definitely lead
to the lowest weighted average cost of capital. One must therefore be careful while applying
WACC method regardless of which model/method employed in order to reduce this cost since
the higher the weighted average cost, the lower it would be for the market value of the stock and
vice versa.
The Effect of the Weighted Average Cost of Capital on Market
In most cases, the market value weights are more superior to book value weights. Market value
reflects the economic values and are not therefore affected by any policies of accounting. They
are also known to be more consistent with the market determined component costs. The
challenge in using the market value is that the market value usually fluctuates frequently and
more widely. Therefore, a market value-based capital means that the amount of debt and the
equity are continuously adjusted as the value of the business entity changes.

Assignment 3
The Relationship between Book value of Equity and the market value of Equity
The value of an asset according to its balance sheet is referred to as the book value of equity and
for the assets, the book value is usually based on the original cost of the asset less depreciation
and the value can either be higher or lower depending of the available practices of accounting
within the company. For instance, assets such as buildings, land and equipment are value based
on their acquisition costs, which is inclusive of the actual amount of the asset. The price
therefore does not change as long as one owns the asset.
On the other hand, market value refers to the prevailing market price at which one can sell an
asset. It is the exact price of an asset which would trade in the competitive setting. Similarly, the
book value on the other hand represents the how much the company’s assets are worth and
therefore it reveals what investors think the company is worth.
Model 4 and the Importance of Market Risk
Market risk premium refers to the difference between the risk-free rate of the return and the
expected return on an investment. It sometimes referred to as the expected rate of return a
risk-free rate and the market portfolio. The investors will often require a higher rate of return
for investing I higher risk while those investors who do not take risk into account, they may
be willing to accept a lower return. The risk-free rate is a theoretical interest rate that would
be paid by an investment with zero risk such as treasury bonds. The model 4 equation
calculates the yields of the bond and the prevailing market risk premium in order to show the
company what value of the estimated discount. The equation 4 is as shown below.
re=rf+B[E(rm)-rf]
where

Assignment 4
rE= Industry specific rate of discount
rf= intermediate term treasury bond yield minus the historical premium on the
treasury bonds over treasury bills
B= is the estimate of the systematic risk for the industry to which j belongs.
E(rm)-rf= is the market risk premium.
Conclusion and Summary of the Article
In relation to the article, it tries to determine the reliability of the valuation estimates of the
company based on the different models. Some estimations and models work better for different
companies depending on how the company is structured.
The article further states that the abnormal earning valuation method is more accurate method of
valuation because it is propelled by the book value rather than the market value. Abnormal
Earning value model shows that the greater reliability of the Abnormal Earning value estimates
is likely driven by the sufficiency of the book value of the equity as a measure of the intrinsic
value and also by the greater precision and the predictability of the abnormal earnings.
The article concludes that there is little to gain from selecting dividends or free cash flow over
the abnormal earning.
The analysis based on the improvements could include real situations in the company and other
practical examples. To the average person who have little or no business background, this article
may look to him/her as a foreign language. Therefore, the article should be well presented and all
the contents clearly presented.

Assignment 5

Assignment 6
References
Jennifer, F., Olsson, P., & Dennis R Oswald. (2000). Comparing the Accuracy and
Explain ability of Dividend, Free Cash Flow and Abnormal Earnings Equity Value
Estimates. Journal of Accounting Research.
Franker, R., &Lee, C. (2006). Accounting Valuation, Market Expectation, and the Book-to
Market Effect. Working paper, University of Michigan and Cornell University.
Heanly, P. (2015). The Effect of Bonus Schemes on Accounting Decisions. Journal of
Accounting and Economics: 85-107.
Maynard, J. (2017). Financial Accounting Reporting and Analysis (second ed.). United
Kingdom: Oxford University Press.