Using CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
Using CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Using CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
Transcribed Image Text:Exhibit 7: Cost of Capital Analysis
Company:
Cathleen Sinclair
General Health & Beauty
Women's Care Company
Skin Care Enterprises
Average
Debt/
Debt/
Value Equity
0.0%
0.0%
5.0%
5.3%
10.0% 11.1%
15.0% 17.6%
20.0% 25.0%
25.0% 33.3%
Debt/
Value
81.6%
16.5%
10.0%
23.6%
32.9%
Tax Rate
Asset Equity
Beta
Beta
1.18
1.22
1.26
1.31
1.18
1.18
1.18
1.18
1.18
1.18
10-Year Treasury
Market Risk Premium
Debt/
Equity
444.9%
19.8%
11.1%
30.9%
49.1%
Assumptions:
Est. Hansson EBITDA Multiple
Est. Hansson Enterprise Value
Existing D/V
Estimated New D/V
Existing Net Debt
Plus: New Expansion Debt
Total Estimated Debt
Assumed Debt Beta
Estimated Cost of Debt
Equity Debt
Beta
Beta
2.22
1.95
1.14
1.35
1.67
1.36 10.56%
1.42
Cost of
Equity
9.67%
9.86%
Cost of
Debt
WACC
7.75%
9.67%
7.75%
9.60%
10.07% 7.75%
9.53%
10.30%
7.75%
9.45%
7.75%
9.38%
10.86% 7.75% 9.31%
3.75%
5.00%
40.0%
7.0x
514.5
49.8
57.8
107.6
9.7%
20.9%
0.25
0.00
0.00
0.00
0.06
0.00
7.75%
Asset
Beta
0.79
1.74
1.07
1.14
1.18
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How were you able to find a D/V of 9.7% and D/V of 20%?
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