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Lester Benchmarking: WACC

Identify and research two to three companies that have dealt with similar issues. For each company selected, discuss the following: (1) situation facing the company (including the key issues that emerged), (2) how the company responded to the issue; and, (3) outcomes of the company's response to the situation. For example, if your three companies are ABC Co, BBD Ltd, and XYZ Inc., there should be three pages, one for each company that provides the information identified.

Based upon the information gathered synthesize the key findings. From the companies researched, identify the key course concepts, and compare and contrast the practices of each company related to those concepts. This section should reflect the team's collaboration.

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Concept: Weighted Average of Cost of Capital

The weighted average cost of capital (WACC) is the average cost of capital on the firm’s existing projects and activities. The weighted average cost of capital for the firm is calculated by weighting the cost of each source of funds by its proportion of the total market value of the firm. It is calculated on a before and after tax basis (Ross et al, 2005). Debt and equity are the two components of the capital funding of a company. Equity holders and lenders expect a certain return on the capital or funds provided. The expected return to shareholders and debt holders is the cost of capital. Therefore, the WACC tells the return that the equity owners and lenders can expect. The WACC can be looked at as an opportunity cost of taking on the risk of putting money into a company. The WACC is an important tool for investors. It helps determine whether to invest or not. The WACC represents the minimum rate of return at which a company produces value for its investors (McClure, 2003). The following is the formula for a firm’s weighted average cost of capital rWACC.

rWACC = B / (B + S) * rB + S / (B + S) * rS

- rB: is the interest rate (cost of debt)
- rS: is the expected return on equity or stock (cost of equity)
- rWACC: is the firm’s weighted average cost of capital
- B: is the value of the firm’s debt or bonds
- S: is the value of the firm’s stock or equity

Relating Companies to Concept:

Lester Electronics must use the WACC tool in determining the feasibility of acquiring ...

Solution Summary

This solution is comprised of a benchmarking synopsis for Lester Electronics. It focuses on the weighted average of cost of capital. Two companies are benchmarked that are related to the Lester scenario. This solution is just under 1000 words and includes 4 references.