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Weighted Average Cost of Capital (WACC) and the factors that

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Discuss the Weighted Average Cost of Capital (WACC) and the factors that affect it.

Why is the emphasis on cash flow instead of net income in capital budgeting?

How does capital budgeting relate to WACC?

Finally, discuss risk analysis in capital budgeting and how you should address it in making a decision (as a manager).

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Discuss the Weighted Average Cost of Capital (WACC) and the factors that affect it.

WACC is a blending of the after-tax cost of loans and the cost of equity financing to figure out the cost of obtaining assets for the business. The factors that impact it are the cost of borrowing for new loans, tax rates, and the market returns on equity of similar risk. WACC moves slowing in response to changes in debt when debt carries fixed interest rates because the rates of interest stay the same over the maturity period of the loan. WACC typically adjusts each year for changes in market returns on similar equities. The ratio of debt to stock will influence WACC as the proportion of interest bearing changes. That is, debt is generally cheaper than equity financing so when firms take on new debt the WACC can come down to reflect larger portion of assets from debt versus equity. Tax rates are a function of legislative action and not ...

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Your tutorial is 564 words and two references. An example of capital budgeting is given.

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The Cost of Capital

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1. Read the attached Economist magazine article on real estate prices and answer the following two questions:

· Discuss at least one factor that has an influence on housing demand that was not given much weight in the article.

· Discuss at least one factor that has an influence on housing supply that was not mentioned in the article.


2. Given the following information on a real multifamily property for sale:

· Asking price: $389,000
· Number of units: 4
· Monthly rent per unit: $625 on one unit; $650 on two units; $675 on one unit
· Square feet per unit: 1,000
· Annual tax expense: $2,960
· Annual insurance expense: $750
· Annual utilities expense: $3,456
· Vacancy rate: 5%
· Assume an interest-only mortgage
· Assume no closing costs
· Analyze first year cash flows only

At what cost of capital does this property produce a net positive cash flow? Does it produce a positive first year cash flow at a 6.5% cost of capital? What other factors will you take into account if you were trying to acquire this property for investment purposes? Show all work in Excel file with included brief discussion.

Attached is the related lecture document.

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