Professional Documents
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Calculating WACC
Weighting the costs Weights correspond to the market values of the forms of financing Do not use book values Each component is weighted according to market-value proportions
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Limitations
Marginal weights Incremental capital Ignore temporary deviations Flotation costs Adjustment made in the projects cash flows Adjusting the cost of capital (biased estimate)
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CAPM
SML
kp
ki Rf
X
2002 Prentice Hall Publishing
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Operating profits
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MVA
Companys total market value
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Evaluation of Acquisitions
Free cash flows Market model implications Enhance the value of a company Purchase price & required return Synergy Diversification effect Effect on total risk
2002 Prentice Hall Publishing
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