Fin 534 Corporate Valuation And Financial

Discussion questionsNameTutor’s Name03/03/2014Corporate Valuation and Financial Planning The Weighted average cos of capital is the return that the suppliers of capital (equity and debt) require as compensation for their contribution of capital. Where the company’s return on capital investment is lower than its weighted average cost of capital (WACC) the consequence is that investors do not get their expected return. Since some types of capital have fixed and preferential returns they will have to be paid first before owners of equity capital. When sales growth rate increases for a company with return on capital lower than WACC the prospects of enough returns to cover WACC are high. The result of this is confidence by the holders of equity capital that they will be receiving their expected returns. Since the equity owners do not withdraw their returns in full a balance will always remain within the operations. This will in the form of working capital or fixed asset hence increasing the value of the operations. If for example a company has a WACC of 20 percent and a return on invested capital (ROIC) of 15 percent