Coke vs. Pepsi Essay

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

G. Weighted average cost of capital is the average rate of return required by all of the company’s investors.

So in order for the company to make a smart decision, they would have to use the WACC (weighted average cost of capital) in order to determine which way they would go about raising that additional capital, whether it be equity (shares of stocks) or debt (a bond issue).

WACC is used to value the entire firm, it used as a starting point to determine the discount rate for project investments. In addition, the WACC is the appropriate rate to use when evaluating the firm performance to determine if the firm has created value for its shareholders.

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?

WACC is the cost the company would incur to raise each new, or marginal, dollar of capital the percentage of which, called weights, should be based on management’s target capital structure and market values as opposed to book values (Brigham & Ehrhardt, 2015). Estimating the cost of debt to be used in the WACC calculation requires assessing the Yield to Maturity (YTM) and Yield to Call (YTC) of bond A and B. YTM is the rate earned on a bond if it is held to maturity and YTC is the rate of interest earned on a bond if it is called (Brigham & Ehrhardt, 2015). Bond A resulted in a YTM of 7.78% and YTC of 10.63% while bond B produced a YTM of 7.87% and YTC of 7.26% (Table 1).

Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.

WACC is the weighted average cost of capital, it estimates the firms ability to raise new funds by either selling debt or equity. Using financial weights, the WACC balances these two different methods of

The purpose of this paper is to analysis companies Coke and Pepsi and determinate (a) which company is better able to pay current liabilities (debt), (b) explain what profitability ratios can tell about a company’s performance and how that information would influence investing decisions, (c) discuss which financial ratios to utilized while examining the company’s most satisfied stockholders, (d) create a list of financial-based guidelines that individuals should follow when selecting to invest and (e) evaluate the single piece of non-financial data most important when deciding to invest or not in a company.

Changes in WACC have a direct impact on the cost that companies pay to acquire capital to grow their businesses. Any increase in the WACC will increase what a firm pays to acquire capital. By increasing the costs to acquire capital firms must search for projects/investments that exceed the cost of capital, in order to meet the investors expected rate of return. Therefore, increases in the cost of capital can affect a firm’s ability to undertake new projects and grow.

» The WACC can be used throughout the firm as the companywide cost of capital for new investments that are:

WACC or weighted average cost of capital is the firm’s cost of capital with each category of capital weighted proportionately. The more debt that company uses, the higher the WACC. The higher the WACC, the higher the company’s risk. When using debt, the WACC begins to fall, but eventually, the costs of debt and equity will cause WACC to increase which will in turn cause the value of the company to drop. This brings us back to the optimal or target capital structure, where the debt to equity ratio maximizes the firm’s value.

With the cost of debt and the cost of equity calculated, the WACC is calculated below. The cost of debt is further discounted by one minus the tax rate since the interest paid on debt is treated as an expense prior to being taxed.

This session long project looks at the calculations used to determine the weighted average cost of capital (WACC). This SLP calculates the WACC for my SLP company – McDonalds, discusses how those calculations were arrived at and briefly describes WACC and what investors use it for.