Capital structure is the percentage of a company’s operating money acquired via debt or equity. It is also an acutely important management decision as it impacts
a company’s risk profile. The weighted average cost of capital (WACC) is an important tool for the capital structure. The cost of capital is a minimum rate of return
on a project for the firm. The cost of capital is inversely related to the value of the firm. The lower the WACC is,the higher the firm’s value. This case study will
provide you an opportunity to explore practical considerations of an optimal capital structure and to calculate the WACC of two firms within the same industry.
Prompt: First, discuss three practical considerations that would guide you in selecting the optimal capital structure for your firm. Rank these considerations from
the most to the least important and explain why you ranked them in that way. Next, go to the website Yahoo! Industry Summary and select two firms within the
same industry. The industry may be that in which you currently work or it may be in anotherindustry that interests you. Calculate the WACC for the two firms.
Discuss how the WACCs compare and also discuss whether the WACCs are what you would expect. Lastly, discuss what might cause the differences between the
two firms’ WACCs.
Specifically,the following critical elementsmust be addressed:
I. Capital Structure
a) Discuss three practical considerationsthat would guide you in selecting an optimal capital structure for your firm.
b) Rank the considerations from most important to least important and explain why.
a) Select two firms within the same industry and calculate the WACC for each firm.
b) Discuss how the WACCs compare.
c) Discuss whether the WACCs are what you would expect.
d) Discuss what might cause the differencesin the two WACCs
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