The intrinsic value of a company is the present value of its expected future free cash flows (FCF) discounted at the weighted average cost of capital (WACC). How does one measure a firm’s risk and the rate of return expected by shareholders? What is ad how is the WACC affected? All else held equal, could the higher risk increase the WACC? Would this which reduce or increase the firm’s value? Please provide numerical examples incorporating the walk-through of the diagram below:

 

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Net operating profit after taxes Value = FCF₁ (1+WACC)¹ Market interest rates Market risk aversion Free cash flow (FCF) FCF₂ (1+ WACC)2 Weighted average cost of capital (WACC) Cost of debt Cost of equity Required investments in operating capital 44 FCF (1+WACC)" Firm's debt/equity mix Firm's business risk Net operating profit after taxes Value = FCF₁ (1+WACC)¹ Market interest rates Market risk aversion Free cash flow (FCF) FCF₂ (1+ WACC)2 Weighted average cost of capital (WACC) Cost of debt Cost of equity Required investments in operating capital 44 FCF (1+WACC)" Firm's debt/equity mix Firm's business risk

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How does one measure a firm s risk and the rate of return expected by shareholders What is ad how is the W ACC affected All else held equal could the ... View the full answer