Question

1) Management Finance and Control Critique Weighted Average Cost of Capital (WACC) concepts, why is WACC an important tool in the evaluation of capital expenditure programs, financial structuring strategies, capital projects, equity recapitalization, dividend determination, financing working capital expansions, and evaluate WACC methods comparing other financial analysis applications used with WACC. Critique Internal Rate of Return and compare to Return on Assets, Investment, Capital, and defend best practice in assessing overall financial performance. Recommend method(s) to justify additional debt critiquing advantages and disadvantages of debt versus equity with special considerations for various debt instruments and alternative equity financing. Predict new trends in finance as applied to cost of rating drops, refinanced liabilities, restructured long term notes, working capital draws, and other new financing methods becoming more important in today’s economic environment. Assess the value of warrants, options, hedge instruments, and the methods of pricing a new equity issue describing what key factors are requisite to launch a successful new stock.

provide a comprehensive review of the question listing the major critical aspects, theories, significance and application of each question. Your answer content must provide a theoretical basis, review of tools, techniques, methods, and procedures covering relevant applications, examples, and inclusions of critical thinking as appropriate. Your answer must demonstrate a complete knowledge of the subject and provide both factual significance and meaningful application of the concepts of the question topic

Answer 1

Discount rate or Rate determine by CAPM might be same when the company has only equity capital. But if company has more than one type of capital that is debt, preferred stock and equity then Company should use Weightage average cost of capital that is discount rate.

A project is financed with differents et of capital that is debt, equity, preferred or might of short term debt. coast and maturity of each type of capital is different, so for evalaution of project it is important to use Weightage average cost of capital as discount.

So, overall return that a firm must make on its existing assets used as the required rate of return on any investment that has essentially the same risk as existing operation is called Weightage average cost of capital (WACC).