Capital Structure and Cost of Capital Define Shareholder's Wealth - Management Assignment Help

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Define Shareholder's wealth? How do you define market value of a company? (Market value of a company = Future cash flows / WACC) Lower the WACC, higher the market value of a company. Yes/No Warm-up Question What mixture of equity and debt will result in the lowest WACC? Let's look at 2 more questions first. Cost of debt is cheaper than cost of equity! Debt is less risky than equity! Example Let’s assume, if interest payments are 10m and the tax rate is 20%, The cost of interest to the company is………………… [After-Tax Cost of Debt = Cost of Debt x (1 – Tax Rate)] The overall approach

• We have seen that when appraising investment projects, a firm may evaluate a project’s returns using the company’s cost of finance (also called the discount rate or cost of capital) to establish the net present value (NPV).

• The main sources of long term finance within a company as equity (or ordinary shares), preference shares and debt. The overall approach Calculating returns

• To calculate the return being demanded, we will assume that in a perfect market:

• market value of investment = the present value of the expected future returns discounted at the investors' required return

• This is the same as saying:

• the investor's required rate = the IRR achieved by investing of return the current price and receiving the future expected returns

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