The Weighted Average Cost of Capital Essay Example | Topics and Well Written Essays - 750 words

The Weighted Average Cost of Capital - Essay sample(Gallagher and Andrew, 2008)However, this point is only hypothetical, in reality this point is impossible to be obtained. What managers can do is ticktack as much chintzy debts as possible and avoid expensive equities. How do you get cheap debts A corporation should do whatever it can to reduce the value of its beta. The beta is a ray for decreasing the cost of capital.A stock with stable returns is less risky than a stock with fluctuating returns. A beta defines the amount by which a stocks returns are fluctuating. The value of returns fluctuates because of changes in present profitability and in store(predicate) commandations. So actions should be taken to keep them stable. (Steven M. Bragg, 2008) The costs and benefits of debts and equities must be evaluated properly. Other than this, the optimal take of capital varies from company to company and industry to industry. For example, a monopoly with very strong demand for a i ncrease can invest in capital to a higher extent than a company which is in a competitive market with limited resources and limited future prospects. (Gallagher and Andrew, 2008)Describe how uncertainty is work outd into capital flows. ... (Gallagher and Andrew, 2008) Describe how uncertainty is calculated into capital flows. Why should two projects with equal cash flows provided unequal risks produce different financial results Would you prefer a low-risk, low-return project or a high-risk, high-return project, and whyWhen cash flows are created, it is assumed that all cash flow will be exactly like you expected, but in real life the cash flow is different, for this reason we calculate uncertainty. (Johnathan Mun, 2005) One way to calculate uncertainty in cash flows is to use a discount rate that reflects the riskiness of cash flows. How do you choose the risk associated with cash flows By risk we are referring to uncertainties of future cash flows. (Gil Fried, Steven J. Shapi ro, Timothy D. DeSchriver, 2007)A certain Discount rate (risk rate) is set that accounts for a percentage of cash flow that might not be there. Therefore, (1-Discount rate) is the proportion which will be there. The formula to calculate the discounted cash flow is as undermentionedDiscounted Cash Flow = Nominal Cash Flow * (1-Discount Rate) Number of yearsNow suppose that Ben and Joe expect to have $1000 at the end of 5 years. Ben feels that the inflation would be high in the access years so he keeps the discount rate (or risk rate) as 6 percent per annum piece Joe keeps the discount rate as 4 percent. Financial results for Ben after 5 years would be $734 succession the financial results for Joe would be $815. Therefore, this is how their financial results will differ. (12manage, 2008)All investors prefer less risk to more. They are too called risk averse and this is a law of finance. But being a risk averse does not mean that investors would not take risks. It just means that an investor is able to