The Weighted Average Cost of Capital - College of …：资本加权平均成本学院….pptVIP

Estimating the Cost of Capital The Cost of Capital To value a company using enterprise DCF, we discount free cash flow by the weighted average cost of capital (WACC). The WACC represents the opportunity cost that investors face for investing their funds in one particular business instead of others with similar risk. In its simplest form, the weighted average cost of capital is the market-based weighted average of the after-tax cost of debt and cost of equity: Successful Implementation Requires Consistency The most important principle underlying successful implementation of the cost of capital is consistency between the components of WACC and free cash flow. To assure consistency, It must include the opportunity costs from all sources of capital — debt, equity, and so on—since free cash flow is available to all investors. It must weight each security’s required return by its market-based target weight, not by its historical book value. It must be computed after corporate taxes (since free cash flow is calculated in after-tax terms). Any financing-related tax shields not included in free cash flow must be incorporated into the cost of capital or valued separately. It must be denominated in the same currency as free cash flow It must be denominated in nominal terms when cash flows are stated in nominal terms The Cost of Capital: An Example The Cost of Equity The Capital Assets Pricing Model Component 1 of the CAPM: The Risk Free Rate Component 2 of the CAPM: The Market Risk Premium Sizing the market risk premium—the difference between the market’s expected return and the risk-free rate—is arguably the most debated issue in finance. Methods to estimate the market risk premium fall in three general categories: Extrapolate historical excess returns. If the risk premium is constant, we can use a historical average to estimate the future risk premium. Regression analysis. Using regression, we can link current market variables, such as the aggregate dividend-to-price ra