CASE STUDY 4: DOMINO’S PIZZA ENTERPRISE:

WEIGHTED AVERAGE COST OF CAPITAL

BY: M NEHA REDDY
MBA 1ST YEAR

1. Ans.
The cost of capital refers to the return that an organisation must achieve
in order to justify the investment of a capital initiative, such as purchasing
new equipment or building a new facility. The cost of capital
encompasses both the expenditure of value and the obligation, as
weighted by the organization's preferred or current capital construction.
Importance:-
Capital construction planning: Capital expenditure is a fundamental
viewpoint in developing a company's fair and ideal capital design. While
developing the company, executives should keep in mind the goal of
improving corporate repute while lowering the cost of capital. By
examining the shifting individual costs of various capital sources, the
monetary administration may select the finest and most sensible source of
funding and establish a stable and balanced capital structure.
Capital planning decisions: The expenditure of capital sources is a
particularly important instrument in the capital planning dynamic cycle.
The cost of financing determines whether a business proposal is accepted
or rejected. A proposition will not be considered unless its rate of return
is faster.
A close examination of subsidised sources: A enterprise can be funded in
a variety of ways. Which of them should be used first is still up in the air
after weighing the expenses of various money sources. The supplier with
the lowest capital expenditure would be chosen. Although the cost of
money is an important consideration in such decisions, so are the factors
of maintaining control and reducing risks.
Financial performance evaluations: Capital expenditure of capital can be
used to analyse the monetary success of capital initiatives. Such
assessments can be conducted by contrasting the true productivity of the
work with the true cost of capital of the funds received to support the
endeavour.

2. Ans.
a. Weights: Obligation and value are commonly used to fund an
organization's resources. We must determine the overall burdens of value
and duty.
Market Cap is another term for the value's (E) market worth. Value
weight = E/(E+D)
Debt weight = D/(E+D)
b. Value cost: Use the capital resource assessing model to get the required
rate of return (CAPM). The equation is Cost of Equity = Risk-Free Rate
of Return + Beta of Asset* (Expected Return of the Market - Risk-Free
Rate of Return)
c. Cost of Debt: To calculate the smoothed-out cost of obligation, divide
the previous fiscal year's end interest charges by the most recent two-year
normal obligation.
d. Duplicate by one short Average Tax Rate: repeat the process using the
most recent two-year average duty rate. The determined usual cost rate is
restricted to a range of 0% to 100%. Assuming that the assessed usual
duty rate is more than 100 percent, 100 percent is used in all cases. It is
set to 0 percent if the determined normal duty rate is less than 0 percent.

3. Ans.
A gamble premium is the extra return that a resource is projected to
deliver over and above the gamble free rate of return. Financial
supporters are compensated as a resource's risk premium. It serves as
compensation to financial supporters for their willingness to admit a more
significant risk in a specific speculation than in a risk-free resource.
The Team considered using the capital resource valuing methodology to
estimate the cost of value (CAPM). The CAPM demonstrated the
relationship between risk and the value cost of the organisation. To
calculate the cost of value, 85 percent of major corporations and 100
percent of financial advisors used the CAPM or a modified version of the
CAPM.

4. Ans.
A bet premium is the extra return that an asset is expected to provide
above and above the bet free rate of return. Monetary friends are
compensated as the asset's risk premium. It compensates monetary
friends for their desire to accept a more crucial gamble in a specific
theory than in a gamble free asset.
The Team investigated using the capital asset valuing methodology to
estimate the cost of considerable worth (CAPM). The CAPM
demonstrated the relationship between risk and the association's worth
expenditure. To calculate the cost of substantial value, 85 percent of
major organisations and 100 percent of financial consultants used the
CAPM or a modified version of the CAPM.
5. Ans.
We use a calculation known as the weighted average cost of capital
(WACC) to calculate how much a company ultimately spends for the
capital it raises when evaluating the profitability of a corporate supporting
mechanism.
Prior to calculating the weighted average, the expenditures associated
with both value and duty were assigned explicit loads. The assessment
safeguard for revenue instalments is then calculated by multiplying the
weighted expenditure of obligation by the corporate duty rate backwards,
or by one less than the duty rate. The absolute weighted typical capital
expense is calculated by summing the weighted expenses of obligation
and value.
WACC=(E/V*Ke) + (D/V) *Kd*(1-TaxRate).

6. Ans.
Hurdle rate: An obstacle rate is the absolute minimum return necessary
on a business or speculation. In light of barrier rates, organisations might
determine whether or not to pursue a certain endeavour. Projects with a
larger incidence of obstacles are often less secure, whilst those with a
lower rate express a lesser risk.