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I'm no expert of WACC or company finance, etc. But from a pure bond pricing/trading perspective, bond price embodies at least two risks: interest rate credit (i.e., the company defaults) If a bond price moves, it could either because of interest rate, or because of credit(i.e., the market views the bond as less or more risky). Following the assumption ...


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The various forms of the Capital Asset Pricing Model, as well as Black-Scholes, are built on top of the axioms of Frequentist Decision Theory. An assumption in the model is that the parameters are known with a probability of one. Generally speaking, this assumption is harmless. There are many models where the result with perfect knowledge is also the ...


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The theoretical futures cost would be spot price plus funding cost, i.e. WACC (that of the average market participant, not yours), plus the cost of storage, plus the cost of taking the oil out of storage and bringing it to the point of delivery, minus any economic benefits that accrue from holding a long position of the commodity


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It depends what you meant by “bank”. For example in the case of Bank of America, the deposit taking entity is Bank of America NA (BANA) which is a wholly owned subsidiary of Bank of America Corp (BAC). The latter does not take deposits , but it issues most of the unsecured debt and it is the issuer of the listed equity of the company. Hence the WACC of BAC ...


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WACC is the weighted average cost of capital therefore from the business's standpoint, they would want to have a lower WACC because it is an average of the % cost of capital. From an investor's standpoint: it can be mixed. For a bondholder, they would want WACC to be a bit high but not by too much. For example, a higher WACC may mean the company is paying a ...


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Point of clarification : are you asking about required returns in pounds sterling for projects conducted in the UK? If so, you also need to adjust for any difference in risk free interest rates between Euro and UK. You can do this be comparing 5yr UK gilt yields with 5year German govt bond yields , for example. I believe the UK yields are higher, so you ...


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It depends. Is the project being carried in the original place or moving to the UK? If the project keeps being in the original place (i.e. euro zone) and you want the IRR in GBP, then you need somehow to factor in the currency fluctuation for the cash-flows. That can be done either through adjusting the cash-flows with an expected exchange rate or by ...


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In fact, the WACC is misinforming us; it is neither a cost nor a required return but a weighted average of a cost and a required return. The corporate finance community promotes the WACC as a comprehensive cost of capital to guide investment decisions. This practice is wrong. Suppose that the risk-free rate is 5% (simple rate), and the required rate of ...


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There may be two points you are missing: You are allowed to apply the CAPM to calculate the cost of equity $R_e$. However, one of the CAPM assumptions is, that taxes are not taken into account into the model. The unlevered WACC gives a theoretical solution under the assumption that there is no debt at all. In conventional WACC, the tax part $t$ only impacts ...


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As noted in the comments, you arrive at the correct conclusion, given your assumptions. This result is usually referred to as the Modigliani-Miller theorem: The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that ...


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The WACC (weighted average cost of capital) formula is a weighted average of the cost of equity and the cost of debt weighted by their respective size (see investopedia definition here). As such, it does not include the inflation rate directly. Inflation should increase the nominal rate of return that investors require to make an investment, especially on ...


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If it helps, this class of problems has a non-existence proof tied to them. Mean-variance finance models have an assumption that all parameters are known built into the proofs. There is an existing proof that shows these models, if true, can never form an estimator for the parameters. Consider the intertemporal budget constraint from the CAPM. It is ...


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Modigliani Miller (MM) tells us that leverage should not affect the value of a firm (under idealized conditions). I think the problem that your are encountering is due to the ambiguous "required return on equity", which as you point out, is subject to estimation error and bias. This is especially true when its parameters are estimated under the CAPM. What ...


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If you are trying to determine the quarterly WACC your tax rate needs to be quarterly as well. Personally, I would take a look at the change in income tax expense. You can also try experimenting with change in (income tax expense / ebit) or adding in income tax expense + deferred tax liability. However, I would say use the quarterly tax rate even if it is ...


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As you can see, the tax rates are listed (from L - R) as 31.0%, 38.5%, 38.5%, and 38.5%, and because your valuations should be forward looking, you should use what is expected, meaning the 38.5% tax rate. Does that make sense?


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