Edward J. Strafaci ~ Academic Blog

Great article on Weighted average Cost of Capital...thoughts? Calculate Weighted Average Cost of Capital The Average Cost of Financing a Company - Cost of Debt and Cost of Equity By  Rosemary Peavler Updated October 19, 2016 https://www.thebalance.com/calculate-weighted-average-cost-of-capital-393130 The weighted average cost of capital is the average interest rate a company must pay to finance its assets. As such, it is also the minimum average rate of return it must earn on its current assets to satisfy its shareholders or owners, its investors, and its creditors. Weighted average cost of capital is based on the business firm's  capital structure  and is composed of more than one  source of financing for the business firm ; for example, a firm may use both  debt financing and equity financing . Cost of capital  is a more general concept and is simply what the firm pays to finance its operations without being specific about the compo...

Financial Dictionary Calculators Articles Weighted Average Cost of Capital (WACC) Share 118 WHAT IT IS: Weighted average cost of capital (WACC)  is the average  rate of return  a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company's target  capital structure . HOW IT WORKS (EXAMPLE): Here is the basic formula for  weighted average  cost of capital : WACC  = ((E/V) * R e ) + [((D/V) * R d )*(1-T)] E =  Market value  of the company's  equity D =  Market value  of the company's  debt V = Total  Market Value  of the company (E + D) R e  =  Cost of Equity R d  = Cost of Debt T=  Tax Rate A company is typically financed using a combination of debt ( bonds ) and equity ( stocks ).  Because a company may rece...

Question from a student: In this video, you discussed the 7 growth valuation methods basic calculations. This was helpful to understand the zero growth, constant growth, variable growth, FCF, book value per share, liquidation and P/E analysis. The video was helpful but it was a little hard to hear compared to your other videos. This video raised some questions regarding the valuations: 1.)  Does the required rate of return change depend on the investor calculating the rate at that time or is it a collective rate among investors? 2.)  For variable growth, do you always have to look at dividend growth and the discounted rate? For example, on the spreadsheet you showed dividend grows at 10%  in one column and 10 % discounted at 15% in the other. 3.)  When looking at Morgan Stanley it traded at 32.07 and the P/E is 16.33. What  P/E would you like to see in a stock compared to the trading price? Is higher always better? Answer: 1. The required rate of re...

This is the problem with chasing dividend yield By Vitaliy N. Katsenelson http://www.marketwatch.com/story/why-good-companies-arent-always-good-stocks-2017-07-06?mg=prod/accounts-mw I was reviewing a new client’s portfolio and found it full of the likes of Coca-Cola, Kimberly-Clark, and Campbell Soup — what I call (pseudo) bond substitutes. Each of these are stable and mature companies. Your mother-in-law would be proud if you worked for any one of them. They have had a fabulous past; they’ve grown revenues and earnings for decades. They were in their glory days when most baby boomers were coming of age. But the days of growth are in the rearview mirror for these companies — their markets are mature, and the market share of competitors is high. They can innovate all day long, but consumers will not be drinking more fizzy liquids, wearing more diapers, or eating more canned soup. If you were to look at these companies’ financial statements, you’d be seriously underimpres...

SOX compliance still costs companies heavily Michael Cohn Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985. Fifteen years after passage of the Sarbanes-Oxley Act, companies are still finding the costs of compliance heavy in terms of both dollars and man hours, according to a new report. The  report , from the consulting firm Protiviti, found the average costs depend in some respects on the number of locations at an organization. While companies with between one and three locations pay an average of $657,383 per year on compliance, those with more than 12 locations are paying $1,561,000 annually. The report is based on a survey of 468 chief audit executives, and internal audit and finance leaders and professionals in U.S.-based public companies in a variety of industries. The number of hours spent on compliance continues to rise, regardless of company size, according to the surv...

During the recession in 2008, could the government predict this as the inflation was decreasing over time?  When the housing crisis occurred one of the problems was the lower interest rates for unequipped buyers. In the book it states “during a recession, federal reserve tries to drive down interest rates”. Can you explain how this helped during the recession?  Simply put, when the Fed floods the markets with cash by literally printing money that in effect lower interest rates, more capital is seeking fewer lenders. The risk the Fed faces is that all of this cash can cause inflation. In a recession that is less of a concern. In a recession, lower rates cause investors to buy stocks, houses cars etc. because the capital in the bank is not earning money. Every investment starts to look better as compared to capital in the bank. You will especially see this when you use lower discount rates in using time value of money calculations. I hope...