Lecture 9 WACC case.pdf

《Lecture 9 WACC case.pdf》由会员上传分享，免费在线阅读，更多相关内容在学术论文-天天文库。

1、WACCThefundamentalconceptisthatinevaluatingtheincrementalcashflowsassociatedwithanewinvestment,incrementalweightsandratesshouldbeemployedinestimatingthecostofcapital.Pioneerhascorrectlyselectedtheincrementalweightsrepresentingtheproportionsofdebtandequitytobeinvestedinprojectsin

2、thefuture.Incontrast,currentweightsreflecttheproportionsusedtofinancepastprojectsandarenotrelevantincapitalbudgetinganalysisofproposedprojects.WACC•Pioneer’scostofequitycalculationisseriouslyflawed.•Pioneershouldearnareturnontheequityproportionofanyinvestmentequaltothereturnshar

3、eholderscanearnonotherinvestmentsofcorrespondingriskinthefinancialmarket.•IfPioneercannotearnthisoutsideopportunitycost,itshouldreturnthefundstoitsshareholders.Otherwise,stockpricesshouldfallandshareholderswillbeharmed.•ThisistherateappropriateforPioneer’sprojectsof“average”risk

4、level.DividendDiscountModelD1R=+gP•TheDDMisanalternativetotheCAPMforcalculatingafirm’scostofequity.•TheDDMandCAPMareinternallyconsistent,butacademicsgenerallyfavortheCAPMandcompaniesseemtousetheCAPMmoreconsistently.–Thismaybeduetothemeasurementerrorassociatedwithestimatingcompan

5、ygrowthMultiplehurdlerates•ShouldPioneeralwaysinvestintheprojectsexpectedtoearnthehighestreturns?--Thereisanobviousanalogueinthesecuritiesmarket:ifinvestorspreferredonlythesecuritiesexpectedtoearnhighreturns,nobodywouldinvestingovernmentbondsorotherlow-returnsecurities.--Therisk

6、-returntradeoffappliestoinvestmentsinrealassets.•IfPioneerisraisingcapitalatarateof11%,shoulditeverinvestina9%pipelineproject?--Theprojectisworthwhileifitisexpectedtoearnareturnhigherthanthecostofcapitalforinvestmentsofitsrisklevel.Multiplehurdlerates•Thefundamentalprincipleisth

7、attheappropriatediscountrateisassociatedwiththeriskleveloftheproject.•Theriskinessofprojectsindifferenteconomicsectorsisobservableinexpectedreturnsinfinancialmarkets.Thesedivisionalhurdlerateswouldreflecttheriskenvironmentofthedivision’seconomicsector.•Theresultswouldbehurdlerat

8、eshigherthanthecorporaterateintheriskierdivisio