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Weighted Average Cost of Capital Worksheet

Long-term financing comes in two primary forms: • Debt: Borrowings that incur interest. Repayment is typically made in the form of periodic interest and principle payments. • Equity: A piece of ownership in the company. Repayment is made through dividends and appreciation of the ownership stake.

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187 views2 pages

Weighted Average Cost of Capital Worksheet

Long-term financing comes in two primary forms: • Debt: Borrowings that incur interest. Repayment is typically made in the form of periodic interest and principle payments. • Equity: A piece of ownership in the company. Repayment is made through dividends and appreciation of the ownership stake.

Uploaded by

ImperoCo LLC
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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WHITE CELLS ARE ADJUSTABLE Kristoffer Burnett - Certified Management Accountant, 2009-2011

Weighted Average Cost of Capital Worksheet


1 Weighted Average Cost of Capital 4.38% 1.57% 0.72% 0.08%

Component Retained earnings Additional paid-in capital L-TDebt1 L-TDebt2

Total Debt to equity ratio

6.75% The optimal capital structure is one that minimizes the WACC 19.2% Sum of all long-term debt / sum of equity financing

Weighted Average Cost of Capital

Retained earnings

Additional paid-in capital

L-TDebt1

L-TDebt2

Notes 1 Weighted average cost of capital (WACC) equals the proportionate amount of the financing * the rate/expected return. The total of the individual components can be used as a default "hurdle rate" when evaluating capital projects.

WHITE CELLS ARE ADJUSTABLE

Weighted Average Cost of Capital Worksheet


INPUT Tax rate Risk of company 1 (extremely safe) - 10 (extremely risky) Expected return for equity investments Risk free rate Most recent annual dividend payment Expected annual growth rate of dividends 1 Component Retained earnings Additional paid-in capital L-TDebt1 L-TDebt2 35.0% This will affect the cost of debt since interest is tax deductible

Kristoffer Burnett - Certified Management Accountant, 2009 -2011 Small business solutions at http://www.imperoco.com

7 Investors in riskier companies likely require a higher return 7.0% The return expected by equity investors in general (i.e. the stock market, other ownership interests, etc) 2.24% This figure is somewhat subjective. The rate on a 10 year treasury note is used as a default 94,086 6.6% Current Value $ 3,611,550 960,032 779,142 97,334 Interest/Dividend Rate or Expected Return 6.6% The cost of retained earnings is equal to the "Expected growth rate of dividends" 8.9% This value equals the amount of equity owned by investors. The cost of this financing is calculated using the Capital Asset Pricing Model 5.0% Multiple blanks are included for debt financing. Not all need to be used 4.5%

Type Equity Equity Debt Debt

Total

$ 5,448,058

Notes 1 Only long-term financing should be included. Short-term borrowings are not included in this calculation and are addressed more in-depth in Managing Working Capital.

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