Company valuation - Discounted Cashflow Analysis (DCF) - Weighted average cost of capital

5 important questions on Company valuation - Discounted Cashflow Analysis (DCF) - Weighted average cost of capital

Why are expected FCF to equity holders discounted by WACC?

In order to get to a fair NPV of these cash flows. Future cash flows are discounted to get to a fair present value, quite simply, because a future cash flow is worth less today than in the future.

What is the calculation of WACC?

Cost of debt * % of debt in the total financing structures plus the cost of equity * % of equity in the total financing structure.

What is cost of debt?

The (after-tax) average interest rate on outstanding debt.
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What is cost of equity?

The average return equity holders expect from an investment over a longer period of time.

If a company has paid $9 million in interest last year on $150 million in bank loans, what is the company's cost of debt?

6%

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