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Medical Technology Company Finance Case

1. What specific items of capital should be included in the SIVMED’s WACC? Should before-tax or after-tax values be included? Should historical or new values be used? Why?

Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis – common stock, preferred stock, bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component by its proportional weight and then adding: where: Re is a cost of equity Rd is a cost of debt E is a market value of the firm’s equity D is a market value of the firm’s debt V equals E + D E/V is a proportion of financing that is equity D/V is a proportion of financing that is debt Tc is a corporate tax rate Broadly speaking, SIVMED’s assets are financed by the choice of debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, SIVMED can determine how much in…

 

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