Principles of Finance/Section 1/Chapter 6/Corp/WACC When valuing
a new venture by a company, it is necessary to use an
appropriate discount rate. However, since corporations can be
structured very differently, it is important to reflect that in
the respective costs of capital. Let's say there are two similar
companies in the same industry. Company A is financed 90% by
equity (that is, stock) and 10% by debt (long term corporate
bonds). Company B is financed by 25% equity, and 75% debt. These
two companies would have to be valued according to their
respective risk levels and required returns. One common way to
determine the cost of capital is to use the Weighted Average
Cost of Capital, or WACC. In this formula, V is equal to the
value of the firm, or Debt (D) plus Equity (E) Example: AKL
corporation is currently financed with $1,000,000 of 7% bonds,
and $2,000,000 of common stock. The stock has a beta of 1.5, and
the risk free rate is 4%, and the market risk premium is 3.5%.
The marginal tax rate for a corpor