Investment Banking Case Study

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Recommended: Compare equity financing to debt financing

University of Malta
Faculty of Economics, Management and Accountancy

Investment Banking
Examine the various components of the Weighted Average Cost of Capital of a firm

Cini Marija 358193 (M)
BKF4211: Investment Banking
Mr. Aldo Scardino
2014-2015
Semester 1

Table of Equations

Equation 1: WACC w/o tax 3
Equation 2: WACC with tax 3
Equation 3: CAPM 4
Equation 4: Cost of debt 4 Weighted Average Cost of Capital - WACC
The Weighted Average Cost of Capital (WACC) is the average rate of return that the firm is expected to pay to its security holders to finance its assets.
A firm has two ways to raise money, either through debt or through equity. WACC is the average of the costs of these two ways of finance. Using WACC the firm can accept or reject a project; if a projects’ NPV has a higher value or equal to the value of the WACC it should …show more content…

As the tax rate decreases, the cost of debt will decrease as the rate on interest on debt will be multiplied by a lower value and vice versa.
Market Value of Equity - E
It is imperative to use the market value not the book value of equity/debt. This is because the market value reflects the true price on the stock market whiles the book value reflects the value that is on the financial statements. Market value of equity is calculated by multiplying the firm’s outstanding shares by the current stock price. If the market is volatile, the stock price is prone to change hence the market value of equity will respond to that change by increasing or decreasing accordingly.
Market Value of Debt – D
Few firms have all their debt in the form of bond; most of the firms have non tradable debt such as bank loans, which is specified in book value terms. This is makes it difficult for the firm to calculate the market

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