conclude that the current market risk premium is 12.7% 10% = 2.7%. In all – likelihood, inflation would also have driven up the expected return on the market. Therefore, the historical return on the market would not be a good estimate of the current expected return on the market. 3. use book weights to estimate the weights for the capital structure. Use the Don’t target capital structure to determine the weights for the WACC. If you have don’t the target weights, then use market value rather than book value to obtain the weights. Use the book value of debt only as a last resort. 4. Always remember that capital components are sources of funding that come from investors. If not a source of funding from an investor, then not a capital it’s it’s component.
conclude that the current market risk premium is 12.7% – 10% = 2.7%. In all likelihood, inflation would also have driven up the expected return on the market. Therefore, the historical return on the market would not be a good estimate of the current expected return on the market. 3. Don’t use book weights to estimate the weights for the capital structure. Use the target capital structure to determine the weights for the WACC. If you don’t have the target weights, then use market value rather than book value to obtain the weights. Use the book value of debt only as a last resort. 4. Always remember that capital components are sources of funding that come from investors. If it’s not a source of funding from an investor, then it’s not a capital component.
FM14e_SM_Ch09.docx