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Warianty tytułu
Adjusting Weighted Average Cost of Capital in the Discount Rate of an Investment Project
Języki publikacji
Abstrakty
In the article author presents the methodology for adjusting weighted average cost of capital (WACC) in the proper discount rate of an investment project. The proper discount rate of an investment project is a weighted average cost of capital adjusted to account for higher risk of a project.
Weighted average cost of capital is the sum of the costs of components of a company's capital multiplied by the share in the total capital. If the risk of a project is higher than the risk of current company's assets, weighted average cost of capital should be adjusted to account for higher risk of a project.
In the article author has presented a methodology of adjusting weighted average cost of capital. In the methodology presented WACC is multiplied by an adjusting ratio which is the coefficient of a variation of a project (the risk of a project divided by its value) divided by the coefficient of variation of the current company's assets.
The coefficient of variation of current assets of a company may be calculated as the standard deviation of company's operating flows divided by their average value calculated on the basis of a few last years.
The coefficient of variation of a project may be calculated as the standard deviation of project's operating flows divided by their average value. In a more sophisticated procedure, the coefficient of variation of a project may be calculated separately for each period of a project and then the coefficient of variation is the weighted average of coefficients for all periods. The coefficient for a period is the standard deviation of the operating flow in that period (under different scenarios) divided by their expected value. (original abstract)
Weighted average cost of capital is the sum of the costs of components of a company's capital multiplied by the share in the total capital. If the risk of a project is higher than the risk of current company's assets, weighted average cost of capital should be adjusted to account for higher risk of a project.
In the article author has presented a methodology of adjusting weighted average cost of capital. In the methodology presented WACC is multiplied by an adjusting ratio which is the coefficient of a variation of a project (the risk of a project divided by its value) divided by the coefficient of variation of the current company's assets.
The coefficient of variation of current assets of a company may be calculated as the standard deviation of company's operating flows divided by their average value calculated on the basis of a few last years.
The coefficient of variation of a project may be calculated as the standard deviation of project's operating flows divided by their average value. In a more sophisticated procedure, the coefficient of variation of a project may be calculated separately for each period of a project and then the coefficient of variation is the weighted average of coefficients for all periods. The coefficient for a period is the standard deviation of the operating flow in that period (under different scenarios) divided by their expected value. (original abstract)
Rocznik
Tom
Strony
148-156
Opis fizyczny
Twórcy
autor
- OMB Consulting we Wrocławiu
Bibliografia
- Brigham E. F., Gapensky L.: Intermediate Financial Management. Dryden Press 1991.
- Brealey R.A.. Meyers S.C.: Principles of Corporate Finance. McGraw-Hill 1991.
- Ustawa z dnia 29 września 1994 r. o rachunkowości (Dz.U. nr 121, poz. 591, z późniejszymi zmianami).
Typ dokumentu
Bibliografia
Identyfikatory
Identyfikator YADDA
bwmeta1.element.ekon-element-000171187859
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