What does the firm's funding really cost?
Estimate equity and debt costs, build the WACC from market values, then see how leverage, taxes and bankruptcy costs affect the funding mix and project value.
The business on one side, its investors on the other
| Assets | |
|---|---|
| Business assets | $1M |
| Total assets | $1M |
| Liabilities and capital | |
|---|---|
| Debt, D | $400k |
| Equity, E | $600k |
| Total liabilities and capital | $1M |
The business on one side, its investors on the other
From a share price to a project decision
- Find next earnings, next dividend and the implied cost of equity.
- Find market debt, both weights and WACC.
- Find the tail’s value at year 4, then the project’s NPV today. Should the firm invest?
- Write the equation its IRR solves and its valid rate domain. Explain whether the cash-flow signs allow the usual IRR rule to mislead.
| Date | Cash flow |
|---|---|
| Today | −$900k |
| Years 1–3 | $120k |
| Year 4 | $120k less investment |
| Year 5 | Growing tail |
Final coming up and the WACC still will not come out right?
Bring your problem sets. We work through them together until every type feels routine.
Questions, answered.
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