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Weighted Average Capital Cost Assignment PDF

   

Added on  2021-04-17

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

Assignment 2Best 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 leadto 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 MarketIn 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 3The 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 RiskMarket 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

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