Question

Choose one of the following to respond to: Discuss the three most common sources of capital...

Choose one of the following to respond to:

Discuss the three most common sources of capital including the advantage and drawbacks to each.

Discuss the payback method for evaluating projects including the components and calculations involved as well as how to evaluate the output. What are the benefits and drawbacks of this method?

Discuss the net present value method for evaluating projects including the components and calculations involved as well as how to evaluate the output. What are the benefits and drawbacks of this method?

Discuss the internal rate of return method for evaluating projects including the components and calculations involved as well as how to evaluate the output. What are the benefits and drawbacks of this method?

Discuss the weighted average cost of capital including how it is calculated and what it represents.

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Answer #1

WACC is calculated as proportion of debt*pre-tax cost of debt*(1-tax rate)+proportion of equity*cost of equity+proportion of preferred stock*cost of preferred stock*cost

pre-tax cost of debt is ytm of bond

cost of equity can be calculated using CAPM: cost of equity=risk free rate+beta*market risk premium

cost of preferred stock is equal to preferred dividends/preferred share price

proportion of a component is that component as % of total capital structure these weights or porportions are in market value terms

It represents minimum rate of return company must earn to create value for investors hence this is return a company would set as a benchmark for averagr risk project accpetance or rejectance

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