Case of American Greetings

CASE of American Greetings

The WACC shows a calculation of the firm's cost of capital in which each category of capital is proportionately weighted. It includes debt and equity, the WACC of a firm increases as the beta and rate of return on equity increases

It's important for a company to know its weighted average cost of capital as a way to gauge the expense of funding future projects.

An increase in WACC means the valuation of the firm is decreasing and the higher risk.

The WACC of American Greetings is 9.1% which is the same number of the average in this industry that means the firm doesn’t have a lot risk in this industry. And the cost of capital is reasonable.

When I calculate the WACC, the provided beta is used when calculate the Re, which equal to

Re= beta + Rf*(Rm-Rf). Beta is a changeable factor which measures the stock returns relative to the equity returns of the overall market. Rf is the government bond rate

WACC represents the average risk faced by the organization.

Beta is a measure of the volatility of a stock's returns relative to the equity returns of the overall market.

For this firm the cost of equity is the return a firm theoretically pays to its equity investors to compensate for the risk they undertake by investing in their company. The firm has higher cost of equity than the peers, thus the investors will get more from the AG in this industry

The cost of debt gives investors an idea as to the riskiness of the company compared with others.

The higher the cost of debt, the higher the risk for the investor, the firm has lower cost of debt compare with other firms with 58%.

For the firm the weight of debt is larger than the weight equity as it has too many shareholders. The firm has lower risk to invest as the cost of debt is low

Question2:

1. What is WACC

2. How to calculate it

3. What the meaning of beta, cost of debt, cost of equity and compare with the competitors.

4. For AG self, weight of debt...