Weighted Average Cost of Capital

WACC Weighted average cost of upper-case letter =WACC= SS+B? Rs+BS+B? RB? 1-tC note Rs , cost of equity RB , cost of debt tC , corporate evaluate rate. For cost of equity, Rs, we calculate it by exploitation the SML, according to CAPM model. Rs=RF+ RM-RF As we post see in the chart hindquarters the case, beta of Worldwide Paper confederation is 1. 10 the Market risk agiotage (RM-RF) is 6. 0%. Because this on-site grandwood woodyard project has 6 year life and the enthronization funds run over two years, the total hanker of this program is more closer to 10-years, we pack the 10-year government bonds as risk exonerate rate, 4. 60%.Thus, Rs=4. 60%+1. 10? 6. 0% =11. 20%. For the cost of debt, there argon two kinds of debts of Worldwide Paper guild, situate loan and long-run debt. The cost of long debt is 5. 78% (A rating 10-years maturities corporate bonds) , and the appreciate of long term debt is $2500M. Thus, RB=5. 78%. For the shelter of equity and debt, market l ever weights argon more appropriate than entertain take to be weights, because the market values of the securities atomic number 18 closer to the actual dollars that would be authentic from their sale. There argon the market weights judge to prevail over the life of the profligate or the project.S=500? $24. 00=$12,000M B=$2500 RWACC=1200012000+3000? 11. 20%+300012000+3000? 5. 88%=9. 76% Payback catamenia course 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 2. 08 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 Cumulative CF -16 -15. 52 -11. 62 -7. 12 -2. 62 1. 88 8. 46 Thus, the payback period is 4+2. 624. 5=4. 58 year. Discounted Payback stop consonant socio-economic class 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 0 0 0 2. 08 discounted CF of investment -16 -2. 18 -0. 0 0 0 0 1. 18 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 discounted OCF 2. 62 3. 73 3. 39 3. 09 2. 81 2. 56 match -16 0. 44 3. 23 3. 39 3. 09 2. 81 3. 74 Cumulati ve CF -16 -15. 56 -12. 33 -8. 94 -5. 85 -3. 04 0. 70 Thus, the discounted payback period is 5+3. 044. 5=5. 81 year. clean Accounting mode YEAR 2007 2008 2009 2010 2011 2012 2013 average net income -0. 12 1. 5 1. 5 1. 5 1. 5 1. 5 1. 23 investment 16 15. 4 13 10 7 4 0 9. 34 Thus, AAR= average out net incomeAverage investment=1. 239. 34=13. 16%Weighted Average Cost of crownworkWACC Weighted average cost of large(p) =WACC= SS+B? Rs+BS+B? RB? 1-tC note Rs , cost of equity RB , cost of debt tC , corporate task rate. For cost of equity, Rs, we calculate it by using the SML, according to CAPM model. Rs=RF+ RM-RF As we stub see in the chart john the case, beta of Worldwide Paper Company is 1. 10 the Market risk support (RM-RF) is 6. 0%. Because this on-site longwood woodyard project has hexad year life and the investment drip over two years, the total long of this program is more closer to 10-years, we subscribe to the 10-year government bonds as risk informal rate, 4. 60%.Thus , Rs=4. 60%+1. 10? 6. 0% =11. 20%. For the cost of debt, there are two kinds of debts of Worldwide Paper Company, swan loan and long-term debt. The cost of long-term debt is 5. 78% (A rating 10-years maturities corporate bonds) , and the value of long term debt is $2500M. Thus, RB=5. 78%. For the value of equity and debt, market value weights are more appropriate than concur value weights, because the market values of the securities are closer to the actual dollars that would be sure from their sale. There are the market weights evaluate to prevail over the life of the slopped or the project.S=500? $24. 00=$12,000M B=$2500 RWACC=1200012000+3000? 11. 20%+300012000+3000? 5. 88%=9. 76% Payback Period YEAR 2007 2008 2009 2010 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 2. 08 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 Cumulative CF -16 -15. 52 -11. 62 -7. 12 -2. 62 1. 88 8. 46 Thus, the payback period is 4+2. 624. 5=4. 58 year. Discounted Payback Period YEAR 2007 2008 2009 201 0 2011 2012 2013 Total CF of investment -16 -2. 4 -0. 6 0 0 0 2. 08 discounted CF of investment -16 -2. 18 -0. 0 0 0 0 1. 18 OCF 2. 88 4. 5 4. 5 4. 5 4. 5 4. 5 discounted OCF 2. 62 3. 73 3. 39 3. 09 2. 81 2. 56 brotherhood -16 0. 44 3. 23 3. 39 3. 09 2. 81 3. 74 Cumulative CF -16 -15. 56 -12. 33 -8. 94 -5. 85 -3. 04 0. 70 Thus, the discounted payback period is 5+3. 044. 5=5. 81 year. Average Accounting method YEAR 2007 2008 2009 2010 2011 2012 2013 average net income -0. 12 1. 5 1. 5 1. 5 1. 5 1. 5 1. 23 investment 16 15. 4 13 10 7 4 0 9. 34 Thus, AAR=Average net incomeAverage investment=1. 239. 34=13. 16%