4 Responses

Work #1:

Actual work where 2 students given their post on this:

In 500 words or more, compare DNS failover and cloud failover.

Use at least three sources. Use the Research Databases available from the Danforth Library not Google. Include at least 3 quotes from your sources enclosed in quotation marks and cited in-line by reference to your reference list.  Example: “words you copied” (citation) These quotes should be one full sentence not altered or paraphrased. Cite your sources using APA format. Use the quotes in your paragaphs.  Stand alone quotes will not count toward the 3 required quotes.

Copying without attribution or the use of spinbot or other word substitution software will result in a grade of 0.

Write in essay format not in bulleted, numbered or other list format.

Reply to two classmates’ posting in a paragraph of at least five sentences by asking questions, reflecting on your own experience, challenging assumptions, pointing out something new you learned, offering suggestions. These peer responses are not ‘attaboys’.

It is important that you use your own words, that you cite your sources, that you comply with the instructions regarding length of your post and that you reply to two classmates in a substantive way (not ‘nice post’ or the like).  Your goal is to help your colleagues write better. Do not use spinbot or other word replacement software. It usually results in nonsense and is not a good way to learn anything. . I will not spend a lot of my time trying to decipher nonsense. Proof read your work or have it edited. Find something interesting and/or relevant to your work to write about.

Work #2:

1) Please describe the weighted average cost of capital.  How do firms use the weighted average cost of capital for decision making?

2) How are the costs of debt and equity calculated?

Please find the two attachments.

Prejith Work:

A company’s weighted average cost of capital (WACC) is the average interest rate it must pay to finance its assets, growth, and working capital. The WACC is also the minimum average rate of return it must earn on its current assets to satisfy its shareholders, investors, or creditors. The result of the WACC calculation is only an estimate. Multiple values in parts of the equation should be substituted to forecast investment possibilities. The WACC is based on a company’s capital structure how it is financed and is comprised of both debt financing and equity financing. The cost of capital is how much a firm pays to finance its operations either debt or equity. Included in the cost of capital are common stock, preferred stock, and debt. The cost of capital is how much interest a company pays on each form of financing (Frank & Shen, (2016)).

A company can raise funds in limited ways. It can sell bonds, borrow money, and leverage equity financing. Cost of capital is considered as the financing costs a company must pay when borrowing money, using equity financing, or selling bonds to fund a big project or investment. In each case, the cost of capital is expressed as an annual interest rate. When weighing a big investment, like funding a new manufacturing plant, the cost of capital represents the return rate the company could garner if it invested cash in an alternative investment, with the same risk applied. That’s why economists equate the cost of capital with the opportunity cost of a company using financial capital for a significant project or investment. Some small business firms only use debt financing for their operations. Other small startups only use equity financing, particularly if they are funded by equity investors such as venture capitalists.

The cost of debt does not represent just one loan or bond. The cost of debt theoretically shows the current market rate the company is paying on its debt. Though, the real cost of debt is not necessarily equal to the total interest paid, because the company is able to benefit from tax deductions on interest paid. The real cost of debt is equal to interest paid less any tax deductions on interest paid. The dividends paid on preferred stock are considered a cost of debt, even though preferred shares are technically a type of equity ownership (Boles, K. E. (1986)).

The cost of equity is complicated to estimate. Shareholders do not explicitly demand a certain rate on their capital in the way bondholders or other creditors do common stock does not have a required interest rate. The most common method used to calculate the cost of equity is known as the capital asset pricing model, or CAPM. This involves finding the premium on company stock required to make it more attractive than a risk-free investment, such as U.S. Treasury’s, after accounting for market risk and unsystematic risk.

Reference:

Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), 300.

Boles, K. E. (1986). Implications of the method of capital cost payment on the weighted average cost of capital. Health Services Research, 21(2), 189.

Dushyanth Work:

Weighted Average Cost of Capital (WACC)

Question 1: Meaning and utilization of the weighted average cost of capital for decision making?

The WACC refers to the discount rate used to determine the net present value of enterprises. Therefore, it assists managed in analyzing common shares, preferred shares, and debt (CFI, n.d).   It also assists in weighting the costs associated with each capital used in the firm’s operations. The WACC is essential to both the management and the investors. It can analyze the contribution of securities that are non-interest bearing. Moreover, it assists in choosing the best common stock (CFI, n.d). Investors can use the WACC to compare different stocks, where the use the one with the highest returns

Question 2: The calculation of the costs of debt and equity

            Organizations operate using debts, equity or earnings. They amass equity from stockholders who invest with them. On the other hand, debts are from intermediate or long-term business loans (Carlson, 2020). They can also result from bonds issued to investors. In the case of debts, the management has to incur some interest. It can determine the interest rate by determining the proportion of debt that goes to the interest paid yearly (Carlson, 2020). Consequently, the cost of debt is the product of the rate by difference between one and the  marginal interest rate.

In the computation of cost of equity (COE), one has to assess the expenses associated with each stock. He should also compute the risk free rate, beta value and the expected market return (Carlson, 2020). Beta refers to the risks of investing in a given stock. Investors should choose the stock with the lowest Beta value. They should subtract the risk free rate form the market return (Carlson, 2020). Eventually, they multiply the result with the beta value and thereafter add the risk free rate.

References

Carlson, R. (2020, June 29). What Is the Weighted Average Cost of Capital? The Balance, Small Business

Corporate Finance Institute. (n.d). WACC: What is WACC, it’s formula, and why it’s used in corporate finance. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-wacc-formula/#:~:text=What%20is%20WACC%20used%20for,a%20hurdle%20rate%20by%20companies.