Financial Management: Principles and Applications, 13/e

14.5 Estimating Project Costs of Capital

Virtually every firm calculates its cost of capital and updates it periodically. As we have just discussed, a firm’s WACC measures a firm’s overall cost of capital and is the discount rate that is used when we want to value the entire firm. For example, when Starbucks (SBUX) considered the acquisition of Seattle’s Best, the appropriate discount rate for the future cash flows of Seattle’s Best was the WACC of Seattle’s Best. Many firms also use their firm’s WACC as the discount rate to value new investment projects, which in theory is only appropriate for new projects that have the same risk characteristics as the overall firm. If the firm has several divisions with different risk characteristics, the discount ...