13– 1
Copyright © 2018 by The McGraw–Hill Companies, Inc. All rights reserved
Copyright © 2018 by The McGraw–Hill Companies, Inc. All rights reserved
Chapter 13
The Weighted–
Average Cost of
Capital and
Company
Valuation
13– 2
Copyright © 2018 by The McGraw–Hill Companies, Inc. All rights reserved
Topics Covered
13.1 Geothermal’s Cost of Capital
13.2 The Weighted–Average Cost of Capital
(WACC)
13.3 Interpreting the WACC
13.4 Measuring Capital Structure
13.5 Estimating Expected Returns
13.6 Valuing Entire Businesses
13– 3
Copyright © 2018 by The McGraw–Hill Companies, Inc. All rights reserved
Cost of Capital (1 of 4)
§Cost of Capital
– The return the firm’s investors could expect to earn if
they invested in securities with comparable degrees of
risk
– The opportunity cost of capital for the firm’s existing
assets.
– The minimum acceptable rate of return when the firm
expands by investing in average-risk projects.
§Capital Structure
–The mix of long-term debt and equity financing
13– 4
Copyright © 2018 by The McGraw–Hill Companies, Inc. All rights reserved
Cost of Capital (2 of 4)
Example
Geothermal Inc. has the following structure.
Given that Geothermal pays 8% for debt and 14%
for equity, what is the company cost of capital?
(Ignoring taxes for now…)
Market value of
debt $194
30%
Market value of equity
453
70
Market value of
assets $647
100%
Cost of Capital (3 of 4)
Example (continued)
Given that Geothermal Inc. pays 8% for debt and
14% for equity, what is the company cost of
