TitmanFinMan12e_Chapter 14_Study Question Solutions

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1、14-4Titman/Keown/Martin•FinancialManagement,TwelfthEditionChapter14SolutionstoStudyQuestions14-1.Wecanthinkofthecostofcapitalforafirmasaweightedaverageoftherequiredreturnsofthesecuritiesthatareusedtofinancethefirm.Werefertothisasthefirm’sWeightedAverageCostofCapital,orWACC.WACCnotonlyincorporates

2、therequiredratesofreturnofthefirm’slendersandinvestorsbutalsoaccountsfortheparticularmixoffinancingsourcesthatthefirmuses.Mostfirmsraisecapitaltofundinvestmentswithacombinationofdebt,equity,andhybridsecuritiesthathaveattributesofbothdebtandequity.Thefirm’sWACCissimplyaweightedaverageofthecostofth

3、esesourcesofcapitaltothefirm.Assuch,afirm’sWACCisablendofthecostsofborrowingmoney(after-taxes)andcostofraisingcapitalfromcommonstockholders.14-2.Wecansummarizethemechanicsofcalculatingthefirm’sWACCusingEquation(14-1)inthethree-stepprocedureillustratedinFigure14-2.Thestepsareasfollows:Step1:Define

4、thefirm’scapitalstructure.Evaluatethefirm’smixofdebtandequityfinancing(commonlyreferredtoasitscapitalstructure)anddeterminetherelativeimportanceofeachcomponentinthemixlistedincolumn(1)ofFigure14-2.Incolumn(2),wecanseetheimportance(weight)ofeachsourceofcapital,whichisbasedonthecurrentmarketvalueof

5、eachsourceofcapital.Step2:Estimatetheopportunitycostofeachofthesourcesoffinancing.Thesecostsareequaltotheinvestor’srequiredratesofreturnafteradjustingthecostofdebtfortheeffectsoftaxes,asshownincolumn(3).Toestimatethesecosts,we’llusethecurrentmarketvalueofeachsourceofcapitalbasedonitscurrent,nothi

6、storical,costs.Step3:Calculateaweightedaverageofthecostsofeachsourceoffinancing.Finally,incolumn(4)wecalculatetheproductoftheafter-taxcostsofeachcapitalsourceusedbythefirmandtheweightsassociatedwitheachsource.Thesumoftheseproductsistheweightedaveragecostofcapitalatthebottomofcolumn(4).Consequentl

7、y,thefirm’sWACCisnothingbutaweightedaverageofthecostsofeachsourceofcapitalusedbythefirmwheretheweightscapturetherelativeimportanceofeachsourceofcapitaltothefirm’scapitalstructure.14-3.Weneedtobeabitcarefulherewhentalki