Company Valuation For Business School

Corporate valuating

The WACC (Weighted Average Cost of Capital) is equal to the return requirements of the providers of equity and debt in dependence on the market values of equity and debt.

The calculation of the cost of capital in the WACC approach is done using weights based on the market values of equity and debt.

The risk-free rate is the return of an investment without any default risk and without any correlation with returns of other assets.

The risk-free rate can be derived from the term structure of interest rates with the help of the Svensson-method.

The tax advantage associated with debt financing is taken into consideration in the weighted capital costs of the WACC approach.

The following data is given:

The risk-free rate is: 4,0%

The market risk premium is: 5,5%

The cost of equity is: 10,0%

According to CAPM, beta is equal to: 1,09

In CAPM, the market risk premium is equal to the difference between an equity investment in a perfectly diversified market portfolio and the risk-free rate.

The following data is given:

The expected return of the market portfolio: 11%

The risk-free rate: 4%

The cost of equity: 5%

According to CAPM, the market risk premium is equal to: 7%

The determination of the cost of equity can be done based on present return expectations or with the help of theoretical capital market models.

The following data is given:

The expected value for the return of the market portfolio is: 11%

The risk-free rate is: 4%

Beta is: 1,2

According to CAPM, the cost of equity is: 12,4%

The following data is given:

The expected value for the return of the market portfolio is:11%

The risk-free rate is: 4%

The cost of equity is: 13%

According to CAPM, beta is equal to: 1,29

The cost of equity usually exceeds the cost of debt.

Changes in interest rates are an example of systematic risk.

Changes in inflation are an example of systematic risk.

Tax reforms are an example of systematic risk.

Changes in indirect labor costs are an example of systematic risk.

Trade agreements among nations are an example of systematic risk.

Environmental standards, wars, bad harvests or natural disasters are examples of systematic risk.

The market positioning is an example of unsystematic risk.

The competitive position of products offered is an example of unsystematic risk.

The existence of barriers to market entry, number and size of the competitors are examples of unsystematic risk.

The market introduction of substitute products is an

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