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Principles of Finance

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Principles of FinanceVideo Activity

Calculating the Weighted Average Cost of Capital

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1 .
What is the formula for calculating WACC? What do each of the components of this formula represent?
2 .
In the video, the tax rate for Brick and Mortar Co. was 30%. What would your calculation of the company’s WACC be if there was a change in the tax code and the tax rate for Brick and Mortar Co. fell to 15%? Why does the tax rate impact a firm’s WACC? Do you think the managers of Brick and Mortar Co. should consider making any changes to its capital structure if the tax rate falls to 15%? Why or why not?

Capital Structure for Real Estate Companies

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3 .
Why doesn’t one optimal capital structure exist for commercial real estate businesses?
4 .
How do you think a family that runs a multigenerational commercial real estate business will think about risk compared to a young entrepreneur who is beginning to build a commercial real estate business? How do you think the capital structures of these two entities are likely to compare? How would those capital structures likely be linked to the risk profiles of the two companies?
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