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Capital Project Cost of Capital Capital Investment

The document discusses the unlevered cost of capital, which evaluates the cost of a capital project without considering debt. It is calculated using the risk-free rate plus the beta multiplied by the difference between the expected market return and risk-free rate. The document also defines weighted average cost of capital (WACC) as the weighted average of the costs of the various sources of funding, including common stock, preferred stock, bonds, and long-term debt. WACC represents a firm's cost of capital and is calculated using the costs of equity and debt weighted by their respective proportions of the firm's total market value.

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37 views

Capital Project Cost of Capital Capital Investment

The document discusses the unlevered cost of capital, which evaluates the cost of a capital project without considering debt. It is calculated using the risk-free rate plus the beta multiplied by the difference between the expected market return and risk-free rate. The document also defines weighted average cost of capital (WACC) as the weighted average of the costs of the various sources of funding, including common stock, preferred stock, bonds, and long-term debt. WACC represents a firm's cost of capital and is calculated using the costs of equity and debt weighted by their respective proportions of the firm's total market value.

Uploaded by

karthu48
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The unlevered cost of capital is an evaluation that uses either a

hypothetical or actual debt-free scenario when measuring the cost to a


firm to implement a particular capital project. The unlevered cost of
capital should illustrate that it is a cheaper alternative than a levered cost
of capital investment program. It is a variation of the cost of capital
calculation.
Unlevered Cost of Capital = (Risk Free Rate) + Beta(Expected Market
Return Risk Free Rate)
To make the calculation, the beta of the investment must be determined.
The beta is a representation of the volatility of a particular stock or
investment over time.

Weighted average cost of capital (WACC) is a calculation of a firm's cost of


capital in which each category of capital is proportionately weighted.
All sources of capital, including common stock, preferred stock, bonds and
any other long-term debt, are included in a WACC calculation.

Where

Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D = total market value of the firms financing (equity and debt)
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

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