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Suppose you are estimating the cost of capital for a firm within the corporate value model....

Suppose you are estimating the cost of capital for a firm within the corporate value model. Explain briefly how you determine the input values for the WACC; in particular, 1) the weights and 2) cost of debt.

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Answer #1

Weights of the company can be calculated by taking the market value of equity,debt and preferred stock .
Market value of Equity=Share Price*Number of outstanding shares
Market value of Preferred Stock=Share Price*Number of Preferred Stock
Market Value of Bond =Bond Price*Number of Bonds

It can also use target capital ratios for estimating WACC.

Cost of Debt can be calculated by calculating the annual YTM of the bond issues. If number of bonds are issued then weighted average cost of debt needs to be calculated.

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