tag:blogger.com,1999:blog-6285680995525398922.post1975076059656967868..comments2023-10-25T03:38:18.508-04:00Comments on Amongst the Stars (Deprecated): How is PE related to WACCJoshua Wonghttp://www.blogger.com/profile/00627690311914462248noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6285680995525398922.post-77409565760265353632009-06-05T07:02:44.127-04:002009-06-05T07:02:44.127-04:00Thanks for the clarification! That's a perfect...Thanks for the clarification! That's a perfect explanation.Joshua Wonghttps://www.blogger.com/profile/00627690311914462248noreply@blogger.comtag:blogger.com,1999:blog-6285680995525398922.post-938741556301004662009-05-15T04:39:00.000-04:002009-05-15T04:39:00.000-04:00r (cost of equity) in the Gordon Growth Model (fir...r (cost of equity) in the Gordon Growth Model (first equation you mentioned) is the same as the one used in computing WACC.<br /><br />WACC = wd * d * (1-t) + we * r<br /><br />wd and we are debt and equity ratios to total capital, and (1-t) is when interest is tax deductible.<br /><br />Debt is used because it is cheaper than equity (which is also why WACC < r). But since it is a fixed cost companies can't just use debt as 100% of their capital structure. They need to find an optimal mix where the total cost of capital is minimum considering other risks.Anonymousnoreply@blogger.com