Hpl Wacc

(1) What discount rate would you choose?

Debt/Value Ratio = (Accounts Payable & Accrued Liabilities+ Long-Term Debt)/ (Total Assets)

| 2,003 | 2,004 | 2,005 | 2,006 | 2,007 |

Debt/Value | 0.39609 | 0.18352 | 0.17431 | 0.16039 | 0.14824 |

Average Debt/Value | 0.21251 | | | | |

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Debt/Value | Debt/Equity | Asset Beta | Equity Beta | Cost of Equity | Cost of Debt | WACC |

0.0% | 0.0% | 1.18 | 1.18 | 9.67% | 7.75% | 9.67% |

5.0% | 5.3% | 1.18 | 1.22 | 9.86% | 7.75% | 9.60% |

10.0% | 11.1% | 1.18 | 1.26 | 10.07% | 7.75% | 9.53% |

15.0% | 17.6% | 1.18 | 1.31 | 10.30% | 7.75% | 9.45% |

20.0% | 25.0% | 1.18 | 1.36 | 10.56% | 7.75% | 9.38% |

25.0% | 33.3% | 1.18 | 1.42 | 10.86% | 7.75% | 9.31% |

21.3% | 27.0% | 1.18 | 1.37 | 10.61% | 7.75% | 9.34% |

WACC = 9.34%

(2)

Flaws of using the WACC as the discount rate:

WACC is not easy to obtain because of the different types of data that have to be found. It is a complicated measure that requires a lot of detailed company information. Just as two people will hardly ever interpret a piece of art the same way, rarely will two people derive the same WACC. And even if two people do reach the same WACC, all the other applied judgments and valuation methods will likely ensure that each has a different opinion regarding the components that comprise the company value

It is important to point out that the WACC is not very useful for companies that have several disparate divisions.

It is also important to note how the numbers in the WACC equation can be somewhat misleading. For example, if a manager at Company A decides WACC is too high and consequently pays off a loan using retained earnings, the loan portion of the WACC calculation will decline assuming no other loans are taken. This could actually increase the cost of capital as the remaining capital may be in a higher cost equity leveraging. Thus, WACC should not be considered...