WACC Essay Example | Topics and Well Written Essays - 750 words

WACC - Essay Example On the other hand, understating the WACC will result in overstatement of future cash flows and net present value, causing a negative net present value project to be accepted. If the project is a financing project, meaning that the cash flow at time 0 is positive and the cash flows in future periods are negative, overstating the WACC will result in understatement of future cash flows and overstatement of net present value, causing a negative net present value project to be accepted. On the other hand, understating the WACC will result in overstatement of future cash flows and understatement of net present value, causing a positive net present value project to be rejected. In the discounted payback period approach, WACC is used as the discount rate for deriving the present value of future cash flows if the investment is financed by both debt and equity. The investment is accepted if payback period of the investment is less than the cutoff time. Overstating the WACC will result in understatement of future cash flows and overstatement of payback period, causing a project that pay backs within the target payback period to be rejected. On the other hand, understating the WACC will result in overstatement of future cash flows and understatement of payback period, causing a project that pays back after the target payback period to be accepted. In the internal rate of return approach, WACC is used as the hurdle rate for deciding whether to accept the project. If the project is an investment project, the project is accepted if the internal rate of return exceeds WACC. If the project is a financing project, the project is accepted if the internal rate of return is smaller than WACC. If the project is an investment project, overstating the WACC will result in the internal rate of return smaller than the WACC and an acceptable project to be rejected. On the other hand, understating the WACC will result in the internal rate of return greater than the WACC and an unacceptable project to be accepted. If the project is a financing project, overstating the WACC will result in the internal rate of return smaller than the WACC and an unacceptable project to be accepted. On the other hand, understating the WACC will result in the internal rate of return greater than the WACC and an acceptable project to be rejected. In the profitability index approach, WACC is used as the discount rate for deriving the present value of future cash flows if the investment is financed by both debt and equity. The investment is accepted if ratio of the present value of the future cash flows divided by the amount of investment is greater than 1. Overstating profitability index, causing an acceptable investment to be rejected.

Business Law (Interbational) Essay Example | Topics and Well Written Essays - 1250 words

Business Law (Interbational) - Essay Example Schafer (31-46) explicitly describes the current rules applicable to the taxation of companies operating internationally. For examples, multinational companies or enterprises, and firms sited in another locality different from the residence of the people in charge of the companies’ administration. The following taxation principles are in operation: Establishment of framework for international taxation: Schafer (31) strongly believes that the first step in determining what kind of taxes to pay to which locality begins by establishing the framework for the taxation. The importance of the framework is to stipulate: one, whether a jurisdiction is entitled to tax income from an internationally run firm; two, the allocation formula among the entities that could claim the rights to the tax income; and, finally, preventive measures to avoid unduly double taxation. Jurisdiction issue: Schafer (33) defines a jurisdiction as the â€Å"company’s residence country where its main activities are concentrated, and the company utilizes the benefits provided by the residence country†. Some of the benefits the residence country (a tax haven, possibly) provides to the company may include economic resources, security or legal, financial, physical and social infrastructures that could be used at a cheaper cost compared with the expensiveness of such benefits at the company owners’ home countries, as in the case of the three friends from OECD countries (Schafer 33). And tax incomes are traditionally paid to the jurisdiction where is company is situated. Technically, a company’s jurisdiction could be described as the place where the company is registered or incorporated. In case it is unclear to ascertain the exact jurisdiction of a company based on its legal registration, the company’s place of economic allegiance, that is , where its main management structure and business operation reside could be taken as the