Suazo - Competency Assessment - ACC222(6513) PDF

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MEL SARAH L. SUAZO ACC222 – 6513COMPETENCY ASSESSMENT1. Prepare a presentation for Williams regarding the concept of WACC.The weighted cost of capital (WACC) is one of the concept for Williams and the cost of the company is to pay the finance of the assets and to identify the riskiness of the firm’s...

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MEL SARAH L. SUAZO

ACC222 – 6513

COMPETENCY ASSESSMENT

1. Prepare a presentation for Williams regarding the concept of WACC. The weighted cost of capital (WACC) is one of the concept for Williams and the cost of the company is to pay the finance of the assets and to identify the riskiness of the firm’s assets. The concept of WACC is to identify by multiplying the capital source whether it’s (debt and equity) through the relevant weighted by market value. WACC is used for business to evaluate the possible long term expenditures and the calculation included is only the long term.

2. Calculate St. Louis Chemical’s WACC (round to the nearest whole number). What arguments should be made to convince Willams of the advantage of using long-term debt in the firm’s capital structure? WACC = W^sub d^(k^sub d^)(l-t) + W^sub 8^(k^sub 8^) Where: w^sub d^ = weight of debt in the company’s target capital structure K^sub d^ = before-tax cost of debt T=marginal income tax rate W^sub 8^ = weight of equity in the company’s target capital structure K^sub 8^ = cost of euity St. Louis Chemical’s WACC = .30 (.10) (1-.30) + .70 (.16) = .021 + .112 = .133 or 13.3% use 13%

3. The discount rate used to evaluate the project reflects the risk level of the project, not the cost of the financing. The cost capital mean the risk level of the firm’s assets, and since both alternative appear to have the same risk level as the firm’s existing assets, the cost of capital should be used to evaluate each alternative.

4. The WACC is used to identify the investment decisions. The assets must be return the firm’s cost of capital. If the asset’s return is less than the WACC, the shareholders will not receive their required return. If the WACC is underestimated, the firm risks is losing the equity and as to unsatisfied investors and to get their funds and put in somewhere that company’s that don’t have difficulty in rasing capital.

5. NPV Strengths • easy to calculate • cash flows and all the lifetime of the project

Weaknesses • assume that you are using the proper opportunity cost rate • to know the knowledge of firm’s WACC

IRR Strengths • its so easy to used • the moneys value time

Weaknesses • not easy to calculate • many projects that have 2 or more projects

The recommendation should include the use of all evaluation methods because each provides valuable information regarding a potential project.

6.

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Evaluation method NPV

Used equipment 43,795

New equipment 190,238

IRR Cash payback period

14% 3.00 years

15% 5.29 years

The real future cash flows and a nominal WACC. The basis will result the understated of NPV and IRR and both will be downward basis. Also if the inflation is neutral because of the costs are equally underestimated.

8 The other issues is about the inflation because nowadays the inflation is very common especially the gas because the gas is inflating to the point that other’s can’t afford the gas because it’s too way higher price than the usuall price....