Week 7A (videos)

Question 1

What are 3 issues in the WACC computation?

Answer 1

1. should be based on market value of equity and debt –> book value of debt is good proxy
2. is Debt-to-Equity ratio representative of the future?
3. firms may explicitly target mix of debt and equity

Question 2

What WACC should you use for a specific project?

Answer 2

Not WACC of the firm, but WACC specific to the project. Risk of project =not the same as risk of the firm.

Question 3

How to calculate the unlevered beta?

Answer 3

B_unlevered = B_levered / (1 + ((1-t)*(D/E))

Question 4

How to use the calculated unlevered beta, to calculate the new levered beta?

Answer 4

B_levered = B_unlevered * (1+((1-t)*(D/E))