25557 Chapter Notes - Chapter 19: Root Mean Square, The Terminal, Accrued Interest
Document Summary
All the variables in the formula are based on the rm"s current characteristics as a whole, but managers use it to discount future after-tax cash ows. The formula gives the right discount rate only for the average project, which is a project with the business risk same as the average of the rm"s existing assets, nanced to maintain the rm"s current, market-value debt ratio. Users of wacc need not worry about small or temporary uctuations in debt ratios that do not change the rm"s long-term nancing policy. Companies with divisions operating in two or more unrelated industries should try to estimate a different benchmark wacc (industry wacc) for each operating division. Divisional wacc is then adjusted for business risk and nancing before being used as the discount rate for a new project. Wacc may be used to value an entire company or business as long as the debt ratio is to remain approximately constant.
