An
interactive approach
introductory finance class
ABSTRACT
Within the introductory finance course, students learn that a financial manager needs to
increase the intrinsic value of his/her firm and that the value
the
firm’s expected future cash flows, discounted by the weighted
(WACC). The WACC
equation represents
introductory class such as time value of money and capital budgeting
WACC should highlight
the formula’s link to
statement information.
Because practitioners apply WACC in several different ways, coverage
should also address issues such as the Capital Asset Pricing Model, the dividend growth model,
and the effect of book and
market value inputs. Because of
introductory course, finance professors must consider the appropriate pedagogical style to use for
effectively teaching WACC. This
instill
in students a strong grasp of WACC concepts.
Keywords: Business education,
active learning,
Journal of Finance and Accountancy
An Interactive Approach, Page
interactive approach
to teaching WACC
concepts in an
introductory finance class
Anne Drougas
Dominican University
Richard Walstra
Dominican University
Steve Harrington
Dominican University
Within the introductory finance course, students learn that a financial manager needs to
increase the intrinsic value of his/her firm and that the value
is derived from
the present value of
firm’s expected future cash flows, discounted by the weighted
average cost of capital
equation represents
a critical component
for several topics within the
introductory class such as time value of money and capital budgeting
. Instructor coverage of
the formula’s link to
accounting by
drawing data from financial
Because practitioners apply WACC in several different ways, coverage
should also address issues such as the Capital Asset Pricing Model, the dividend growth model,
market value inputs. Because of
time constraints within the
introductory course, finance professors must consider the appropriate pedagogical style to use for
effectively teaching WACC. This
paper describes a technology-
based assignment intended to
in students a strong grasp of WACC concepts.
active learning,
weighted average
cost of capital
Journal of Finance and Accountancy
An Interactive Approach, Page
1
concepts in an
Within the introductory finance course, students learn that a financial manager needs to
the present value of
average cost of capital
for several topics within the
. Instructor coverage of
drawing data from financial
Because practitioners apply WACC in several different ways, coverage
should also address issues such as the Capital Asset Pricing Model, the dividend growth model,
time constraints within the
introductory course, finance professors must consider the appropriate pedagogical style to use for
based assignment intended to
cost of capital
INTRODUCTION AND LITERATURE REVIEW
Teaching introductory finance is a challenge, even for experienced instructors
(Biktimirov
& Nilson, 2003). Part of the challenge relates to instructing general business majors
who might not see the relevancy of the finance course nor easily grasp the concepts (Hess, 2005).
The course is vital, however, in that it builds upon its prerequisite, f
(McWilliams & Peters, 2012), and affords the non
few curricular opportunities, to meaningfully link financial statement information with
managerial decision-making.
Although
relevancy of the introductory course’s topical coverage, the course further challenges faculty to
identify teaching tools that engage students in an active learning process. Brown (2005) proposed
that active learning involve
s a new paradigm based on understanding and discovery versus
memorization and recall. S
tudents are visual learners (Baker & Post, 2006) who prefer
assignments that clearly communicate the relevance of topics, such as finance, within the
workplace (Bale & D
udney, 2000). As Biktim
need an “arsenal” of teaching tools at their disposal to develop student
engage students at a level “appropriate” for the curriculum and course objectives (Ha
Saunders, 2009).
Regarding topical coverage in the introductory finance class, seminal studies by Berry
and Farragher (1987) and Cooley and Heck (1996) surveyed finance professors and the results
demonstrated an emphasis on cost of capital. The Be
identified cost of capital/capital structure as one of the three primary topics at both the
undergraduate and graduate level, and within that area,
Surveys by Gup (1994) and Lai
, Kwan
practitioners also placed a high value on cost of capital. Student surveys have echoed these
results (Krishnan, Bathala, Bhattacharya, & Richie, 1999; Balachandran, Skully, Tant, &
Watson, 2006; Lai, et al., 2010).
T
he concept of WACC is central to the field of finance and pervades many other
however,
finance professors must balance their coverage of WACC with other priorities. The
sheer volume of material available within an introductory finance textb
design extremely difficult. As an example, a review of the
finance textbook (Brigham & Houston, 2013) reveals the scope of the challenge. Early chapters
address core topics such as time value of money, r
chapters explore other finance topics including cost of capital and capital structure. Relative to
cost of capital, faculty must decide when to introduce the concept and to what degree of detail.
Early on, many instr
uctors might simply incorporate an assumed rate. Others might elect to
carefully guide students through the components of the WACC calculation. Additionally, faculty
must determine the extent to which they will challenge students to use detailed financial
statements as a source for cost of capital data. In a review of finance textbooks, McWilliams and
Peters (2012) found little integration of financial statement information.
The assignment described below
of WACC within the introductory finance class. By incorporating an interactive Excel
worksheet, instructors can (1) develop student knowledge of the WACC formula and the factors
that affect WACC, (2) reinforce the importance of financial statements
between topics generally covered earlier in the course (e.g., bond and stock valuation) with those
covered nearer to the end (e.g., capital budgeting, cash flow and risk estimation). The assignment
helps students discover how el
ements of the financial statements drive WACC and allows them
Journal of Finance and Accountancy
An Interactive Approach, Page
INTRODUCTION AND LITERATURE REVIEW
Teaching introductory finance is a challenge, even for experienced instructors
& Nilson, 2003). Part of the challenge relates to instructing general business majors
who might not see the relevancy of the finance course nor easily grasp the concepts (Hess, 2005).
The course is vital, however, in that it builds upon its prerequisite, f
inancial accounting
(McWilliams & Peters, 2012), and affords the non
-
finance major an opportunity, perhaps one of
few curricular opportunities, to meaningfully link financial statement information with
Although
finance majors ar
e more likely to understand the
relevancy of the introductory course’s topical coverage, the course further challenges faculty to
identify teaching tools that engage students in an active learning process. Brown (2005) proposed
s a new paradigm based on understanding and discovery versus
tudents are visual learners (Baker & Post, 2006) who prefer
assignments that clearly communicate the relevance of topics, such as finance, within the
udney, 2000). As Biktim
ir
ov and Nilson (2003) suggest, finance educators
need an “arsenal” of teaching tools at their disposal to develop student
-
centric assignments that
engage students at a level “appropriate” for the curriculum and course objectives (Ha
Regarding topical coverage in the introductory finance class, seminal studies by Berry
and Farragher (1987) and Cooley and Heck (1996) surveyed finance professors and the results
demonstrated an emphasis on cost of capital. The Be
rry and Farragher survey, for example,
identified cost of capital/capital structure as one of the three primary topics at both the
undergraduate and graduate level, and within that area,
WACC
was the principal sub
, Kwan
, Kadir, Abdullah and Yap
(2010) disclosed that
practitioners also placed a high value on cost of capital. Student surveys have echoed these
results (Krishnan, Bathala, Bhattacharya, & Richie, 1999; Balachandran, Skully, Tant, &
he concept of WACC is central to the field of finance and pervades many other
finance professors must balance their coverage of WACC with other priorities. The
sheer volume of material available within an introductory finance textb
ook can make course
design extremely difficult. As an example, a review of the
twenty-one
chapters of a popular
finance textbook (Brigham & Houston, 2013) reveals the scope of the challenge. Early chapters
address core topics such as time value of money, r
isk analysis, and valuation. Additional
chapters explore other finance topics including cost of capital and capital structure. Relative to
cost of capital, faculty must decide when to introduce the concept and to what degree of detail.
uctors might simply incorporate an assumed rate. Others might elect to
carefully guide students through the components of the WACC calculation. Additionally, faculty
must determine the extent to which they will challenge students to use detailed financial
statements as a source for cost of capital data. In a review of finance textbooks, McWilliams and
Peters (2012) found little integration of financial statement information.
The assignment described below
presents a student-
centric approach to teaching th
of WACC within the introductory finance class. By incorporating an interactive Excel
worksheet, instructors can (1) develop student knowledge of the WACC formula and the factors
that affect WACC, (2) reinforce the importance of financial statements
, and (3) create a “bridge”
between topics generally covered earlier in the course (e.g., bond and stock valuation) with those
covered nearer to the end (e.g., capital budgeting, cash flow and risk estimation). The assignment
ements of the financial statements drive WACC and allows them
Journal of Finance and Accountancy
An Interactive Approach, Page
2
Teaching introductory finance is a challenge, even for experienced instructors
& Nilson, 2003). Part of the challenge relates to instructing general business majors
who might not see the relevancy of the finance course nor easily grasp the concepts (Hess, 2005).
inancial accounting
finance major an opportunity, perhaps one of
few curricular opportunities, to meaningfully link financial statement information with
e more likely to understand the
relevancy of the introductory course’s topical coverage, the course further challenges faculty to
identify teaching tools that engage students in an active learning process. Brown (2005) proposed
s a new paradigm based on understanding and discovery versus
tudents are visual learners (Baker & Post, 2006) who prefer
assignments that clearly communicate the relevance of topics, such as finance, within the
ov and Nilson (2003) suggest, finance educators
centric assignments that
engage students at a level “appropriate” for the curriculum and course objectives (Ha
milton &
Regarding topical coverage in the introductory finance class, seminal studies by Berry
and Farragher (1987) and Cooley and Heck (1996) surveyed finance professors and the results
rry and Farragher survey, for example,
identified cost of capital/capital structure as one of the three primary topics at both the
was the principal sub
-topic.
(2010) disclosed that
practitioners also placed a high value on cost of capital. Student surveys have echoed these
results (Krishnan, Bathala, Bhattacharya, & Richie, 1999; Balachandran, Skully, Tant, &
he concept of WACC is central to the field of finance and pervades many other
topics;
finance professors must balance their coverage of WACC with other priorities. The
ook can make course
chapters of a popular
finance textbook (Brigham & Houston, 2013) reveals the scope of the challenge. Early chapters
isk analysis, and valuation. Additional
chapters explore other finance topics including cost of capital and capital structure. Relative to
cost of capital, faculty must decide when to introduce the concept and to what degree of detail.
uctors might simply incorporate an assumed rate. Others might elect to
carefully guide students through the components of the WACC calculation. Additionally, faculty
must determine the extent to which they will challenge students to use detailed financial
statements as a source for cost of capital data. In a review of finance textbooks, McWilliams and
centric approach to teaching th
e topic
of WACC within the introductory finance class. By incorporating an interactive Excel
worksheet, instructors can (1) develop student knowledge of the WACC formula and the factors
, and (3) create a “bridge”
between topics generally covered earlier in the course (e.g., bond and stock valuation) with those
covered nearer to the end (e.g., capital budgeting, cash flow and risk estimation). The assignment
ements of the financial statements drive WACC and allows them
to explore how changes to the various components of the formula will affect WACC. By gaining
an understanding of the intricacies of WACC, students are better prepared to move on to more
advanced finance topics.
The financial
educator’s charge
Saunders (2001) called for greater use of multiple teaching methods and assessment
techniques within the introductory finance course. In a national survey, Saunders
the majority of finance professors relied heavily on traditional lecture and in
way to deliver key material. Hamilton and Saunders (2009) updated this survey and found no
difference in teaching strategies within the intro
educator (1) used the Brigham and Houston (concise) text or some version of the Brigham series,
(2) utilized financial calculators (undergraduate) and formulas (graduate) to solve financial
problems, and (3) relied on in-
class testing as a major determinant for a student’s final grade.
The authors acknowledged the efforts of finance educators who have attempted to engage
students within the introductory finance class through the implementation of case studies
(Nun
nally & Evans, 2003), team projects (Faulk & Smolira, 2008), s
2008
), instant messaging (Michelson & Smith, 2008), and podcasting (Reimers & Singleton,
2008). However, these pedagogies appear to represent exceptions to the rule.
A review of the literature on student learning offers many calls for student
learning. Angelo (1993) encouraged an active, interactive process. Citing the work of Angelo,
Ardalan (2006) stated
“understanding learning styles helps to improve teachi
enhance student learning” (p. 3).
strategies to engage all students.
lecture-
driven “instructor paradigm” to a “learning par
teaching and assessment techniques. This becomes particularly important when educating the
current generation of college students, often ref
members have been described as high
to explore (Windham, 2005). If financial educators are to reach these students, they must first
understand them and then adapt teaching methodologies to suit them. “The Net Gen is oriented
toward
inductive discovery or making observations, formulating hypotheses, and figuring out the
rules. They crave interactivity” (Oblinger & Oblinger, 2005, p. 2.7).
Finance faculty can build an interactive finance course suitable for the Net Gens by
incorporatin
g technology. Faculty have used technology in a number of different ways
(Saunders, 2001); however, they have not always done so successfully (Cudd, Lipscomb, &
Tanner, 2003). Cudd, Lipscomb, and Tanner claim “spreadsheet analysis is the primary tool of
th
e financial manager” (p. 246) and the tech
2005). Technology, therefore,
can bridge students’ abilities with
states, “by using IT properly in the classroom, teaching and learning
new dimension” (p.4.2). The Association to Advance Collegiate Schools of Business
has also emphasized the importance of technology. In its 2002 report by the Management
Education Task Force, AACSB encouraged instructors t
decisions utilizing technology (McWilliams & Peters, 2012).
Recent efforts by
Villanova University to answer AACSB’s call for curriculum change
have reiterated the importance and need to incorporate financial statements within the finance
curriculum. The university created
Journal of Finance and Accountancy
An Interactive Approach, Page
to explore how changes to the various components of the formula will affect WACC. By gaining
an understanding of the intricacies of WACC, students are better prepared to move on to more
educator’s charge
: Emphasizing student-centered learning
Saunders (2001) called for greater use of multiple teaching methods and assessment
techniques within the introductory finance course. In a national survey, Saunders
the majority of finance professors relied heavily on traditional lecture and in
-
class testing as a
way to deliver key material. Hamilton and Saunders (2009) updated this survey and found no
difference in teaching strategies within the intro
ductory finance course. The typical finance
educator (1) used the Brigham and Houston (concise) text or some version of the Brigham series,
(2) utilized financial calculators (undergraduate) and formulas (graduate) to solve financial
class testing as a major determinant for a student’s final grade.
The authors acknowledged the efforts of finance educators who have attempted to engage
students within the introductory finance class through the implementation of case studies
nally & Evans, 2003), team projects (Faulk & Smolira, 2008), s
preadsheet tools (Hallows,
), instant messaging (Michelson & Smith, 2008), and podcasting (Reimers & Singleton,
2008). However, these pedagogies appear to represent exceptions to the rule.
A review of the literature on student learning offers many calls for student
learning. Angelo (1993) encouraged an active, interactive process. Citing the work of Angelo,
“understanding learning styles helps to improve teachi
ng performance and
Ardalan believed finance faculty s
hould use diverse teaching
Barr and Tagg (1995)
advocated movement away from a
driven “instructor paradigm” to a “learning par
adigm” encompassing a variety of
teaching and assessment techniques. This becomes particularly important when educating the
current generation of college students, often ref
erred to as the Net Generation
(Net Gen)
members have been described as high
achievers, technically adept, and multi-
taskers with a need
to explore (Windham, 2005). If financial educators are to reach these students, they must first
understand them and then adapt teaching methodologies to suit them. “The Net Gen is oriented
inductive discovery or making observations, formulating hypotheses, and figuring out the
rules. They crave interactivity” (Oblinger & Oblinger, 2005, p. 2.7).
Finance faculty can build an interactive finance course suitable for the Net Gens by
g technology. Faculty have used technology in a number of different ways
(Saunders, 2001); however, they have not always done so successfully (Cudd, Lipscomb, &
Tanner, 2003). Cudd, Lipscomb, and Tanner claim “spreadsheet analysis is the primary tool of
e financial manager” (p. 246) and the tech
-
savvy Net Gen prefer to learn by doing (McNeely,
can bridge students’ abilities with
industry’s
needs. As McNeely
states, “by using IT properly in the classroom, teaching and learning
are enhanced and given a
new dimension” (p.4.2). The Association to Advance Collegiate Schools of Business
has also emphasized the importance of technology. In its 2002 report by the Management
Education Task Force, AACSB encouraged instructors t
o equip students to make better business
decisions utilizing technology (McWilliams & Peters, 2012).
Villanova University to answer AACSB’s call for curriculum change
have reiterated the importance and need to incorporate financial statements within the finance
curriculum. The university created
a six-
credit hour course integrating the introductory financial
Journal of Finance and Accountancy
An Interactive Approach, Page
3
to explore how changes to the various components of the formula will affect WACC. By gaining
an understanding of the intricacies of WACC, students are better prepared to move on to more
Saunders (2001) called for greater use of multiple teaching methods and assessment
techniques within the introductory finance course. In a national survey, Saunders
discovered that
class testing as a
way to deliver key material. Hamilton and Saunders (2009) updated this survey and found no
ductory finance course. The typical finance
educator (1) used the Brigham and Houston (concise) text or some version of the Brigham series,
(2) utilized financial calculators (undergraduate) and formulas (graduate) to solve financial
class testing as a major determinant for a student’s final grade.
The authors acknowledged the efforts of finance educators who have attempted to engage
students within the introductory finance class through the implementation of case studies
preadsheet tools (Hallows,
), instant messaging (Michelson & Smith, 2008), and podcasting (Reimers & Singleton,
A review of the literature on student learning offers many calls for student
-centered
learning. Angelo (1993) encouraged an active, interactive process. Citing the work of Angelo,
ng performance and
hould use diverse teaching
advocated movement away from a
adigm” encompassing a variety of
teaching and assessment techniques. This becomes particularly important when educating the
(Net Gen)
whose
taskers with a need
to explore (Windham, 2005). If financial educators are to reach these students, they must first
understand them and then adapt teaching methodologies to suit them. “The Net Gen is oriented
inductive discovery or making observations, formulating hypotheses, and figuring out the
Finance faculty can build an interactive finance course suitable for the Net Gens by
g technology. Faculty have used technology in a number of different ways
(Saunders, 2001); however, they have not always done so successfully (Cudd, Lipscomb, &
Tanner, 2003). Cudd, Lipscomb, and Tanner claim “spreadsheet analysis is the primary tool of
savvy Net Gen prefer to learn by doing (McNeely,
needs. As McNeely
are enhanced and given a
new dimension” (p.4.2). The Association to Advance Collegiate Schools of Business
(AACSB)
has also emphasized the importance of technology. In its 2002 report by the Management
o equip students to make better business
Villanova University to answer AACSB’s call for curriculum change
have reiterated the importance and need to incorporate financial statements within the finance
credit hour course integrating the introductory financial
accounting and introductory finance course
throughout the course (McWilliams & Peters, 2012). After conducting an extensive review of the
popular textbooks in finance, McWilliams and Peters discovered that many introductory finance
texts use “skeletal financial statements
financial statements
” (p. 312). Furthermore, the authors suggested that many finance topics,
including the cost of capital, should be taught with a more explicit focus upon financial
statements.
The
financial educator’s charge: Highlighting relevancy of financial applications
In addition to the challenge finance educators face in developing an active, engaging
learning environment, they must focus the learning around topics that are relevant within
finance profession. Sometimes, topics emphasized by financial educators are different than
topics deemed important by practitioners. For example,
practitioner perspective and discovered that CEOs place a higher valu
capital factors than finance professors.
and capital budgeting. Current research highlights papers with a student
to both TVM (e.g., Bianco
, Nelson
2010
). The cost of capital, however defined or measured, underpins both calculations.
In light of the importance of cost of capital from a practitioner’s
coverage of WACC with
in the finance curricula
For example, Pagano and Stout (2004) considered the cost of capital to be fundamental to the
work of finance and accounting professionals and they identified several uses for the tool
addition, Adelman and Cross (2005
by courts and regulators for rate setting in industries such as insurance and utilities. In both
papers, WACC was presumed to be the formula for the cost
Partington, and Peat (2008) conducted a practitioner survey and their findings showed firms used
cost of capital 88% of the time for evaluation techniques
they developed an estimate of WAC
As students gain an
appreciation
must recognize
the purpose of WACC as a rate of return used for valuing a stream of expected
cash flows. Students need to appreciate how the discount rate drives b
decisions and the TVM. Additionally, students must understand that value
organization hinges on capital investment
FEATURES OF THE WACC SPREADSHEET
The spreadsheet assignment provides an interactive approach to the topic of WACC
within the introductory finance course.
from the lead author upon request.
equation with students during class. Next, the instructor describes the spreadsheet students will
use to explore the components of WACC. The starting point for the assignment is a set of
condensed financial statements for a fictitious company. Th
and equity components within the statements. The pre
macros and VBA-
coded control buttons that guide students in a step
various factors that influence
WACC. The spreadsheet minimizes the need for mathematical
Journal of Finance and Accountancy
An Interactive Approach, Page
accounting and introductory finance course
s. Financial stateme
nts were a prevalent theme
throughout the course (McWilliams & Peters, 2012). After conducting an extensive review of the
popular textbooks in finance, McWilliams and Peters discovered that many introductory finance
texts use “skeletal financial statements
without actual integration or derivation of numbers in
” (p. 312). Furthermore, the authors suggested that many finance topics,
including the cost of capital, should be taught with a more explicit focus upon financial
financial educator’s charge: Highlighting relevancy of financial applications
In addition to the challenge finance educators face in developing an active, engaging
learning environment, they must focus the learning around topics that are relevant within
finance profession. Sometimes, topics emphasized by financial educators are different than
topics deemed important by practitioners. For example,
Lai, et al. (2010) investigated the
practitioner perspective and discovered that CEOs place a higher valu
e on accounting and cost of
capital factors than finance professors.
The two primary topics are
time value of money (TVM)
and capital budgeting. Current research highlights papers with a student
-
centric focus pertaining
, Nelson
& Poole, 2010) and capital budgeting (Ben-
Horin & Kro
). The cost of capital, however defined or measured, underpins both calculations.
In light of the importance of cost of capital from a practitioner’s
perspective, increasing
in the finance curricula
will better
prepare students for the workplace.
For example, Pagano and Stout (2004) considered the cost of capital to be fundamental to the
work of finance and accounting professionals and they identified several uses for the tool
addition, Adelman and Cross (2005
)
also highlighted the breadth of applications including its use
by courts and regulators for rate setting in industries such as insurance and utilities. In both
papers, WACC was presumed to be the formula for the cost
of capital. Lastly, Truong,
Partington, and Peat (2008) conducted a practitioner survey and their findings showed firms used
cost of capital 88% of the time for evaluation techniques
while
84% of the respondents indicated
they developed an estimate of WAC
C.
appreciation
of the cost of capital and learn to calculate WACC, they
the purpose of WACC as a rate of return used for valuing a stream of expected
cash flows. Students need to appreciate how the discount rate drives b
oth capital budgeting
decisions and the TVM. Additionally, students must understand that value
creation
organization hinges on capital investment
returns exceeding the cost of capital.
FEATURES OF THE WACC SPREADSHEET
The spreadsheet assignment provides an interactive approach to the topic of WACC
within the introductory finance course.
An electronic copy of the spreadsheet can be obtained
from the lead author upon request.
The instructor begins the process by reviewing
equation with students during class. Next, the instructor describes the spreadsheet students will
use to explore the components of WACC. The starting point for the assignment is a set of
condensed financial statements for a fictitious company. Th
e financial data emphasizes the debt
and equity components within the statements. The pre
-
formatted spreadsheet includes embedded
coded control buttons that guide students in a step
-by-
step fashion through the
WACC. The spreadsheet minimizes the need for mathematical
Journal of Finance and Accountancy
An Interactive Approach, Page
4
nts were a prevalent theme
throughout the course (McWilliams & Peters, 2012). After conducting an extensive review of the
popular textbooks in finance, McWilliams and Peters discovered that many introductory finance
without actual integration or derivation of numbers in
” (p. 312). Furthermore, the authors suggested that many finance topics,
including the cost of capital, should be taught with a more explicit focus upon financial
financial educator’s charge: Highlighting relevancy of financial applications
In addition to the challenge finance educators face in developing an active, engaging
learning environment, they must focus the learning around topics that are relevant within
the
finance profession. Sometimes, topics emphasized by financial educators are different than
Lai, et al. (2010) investigated the
e on accounting and cost of
time value of money (TVM)
centric focus pertaining
Horin & Kro
ll,
). The cost of capital, however defined or measured, underpins both calculations.
perspective, increasing
prepare students for the workplace.
For example, Pagano and Stout (2004) considered the cost of capital to be fundamental to the
work of finance and accounting professionals and they identified several uses for the tool
. In
also highlighted the breadth of applications including its use
by courts and regulators for rate setting in industries such as insurance and utilities. In both
of capital. Lastly, Truong,
Partington, and Peat (2008) conducted a practitioner survey and their findings showed firms used
84% of the respondents indicated
of the cost of capital and learn to calculate WACC, they
the purpose of WACC as a rate of return used for valuing a stream of expected
oth capital budgeting
creation
within an
The spreadsheet assignment provides an interactive approach to the topic of WACC
An electronic copy of the spreadsheet can be obtained
The instructor begins the process by reviewing
the WACC
equation with students during class. Next, the instructor describes the spreadsheet students will
use to explore the components of WACC. The starting point for the assignment is a set of
e financial data emphasizes the debt
formatted spreadsheet includes embedded
step fashion through the
WACC. The spreadsheet minimizes the need for mathematical
calculation of WACC by incorporating
students to study how changes
in
magnitude and direct
ion of WACC. Because students do not need to perform calculations or
gather information, they are able to focus on expanding their knowledge of the WACC formula
and recognizing several factors that influence WACC.
The spreadsheet consists of three exhibits
with the financial statement and market data that drive the WACC calculation. The exhibit
highlights the differences between book and market values since both valuations are used by
practitioners in the deter
mination of WACC (Truong, Partington, & Peat, 2008). Exhibit 2A
builds on the previous exhibit by reflecting cost of debt on a pre
presenting the cost of equity under the CAPM and dividend
gives st
udents the opportunity, through the use of
that affect the cost of debt and the cost of equity under both the CAPM and DIV models.
Students can also modify the strategic mix of debt and equity. Further detail o
the exhibits follows:
Exhibit 1A and Exhibit 1B: Weights of debt (w
As indicated in Exhibit 1A (Appendix), the spreadsheet contains financial statement
information with embedded macro buttons, prompting students to
weights and market value weights of debt and equity, respectively. As indicated in Exhibit 1B
(Appendix), the macro buttons trigger book value calculations, market value calculations, and a
summary table for w
D
and w
E,
respectively
students identify the source for each calculation. Within this first worksheet, all students have a
common starting point for WACC calculations as they tie WACC back to financial statement
analysis. Instr
uctors may wish to prompt students to consider how a change in a firm’s stock
price or the number of shares outstanding impacts w
Exhibit 2A and Exhibit 2B: The cost of debt (r
As indicated in Exhibit 2A (Appendix),
relevant financial statement information from the first worksheet (see Exhibits 1A and 1B) to the
second worksheet. The summary schedule presented in Exhibit 2A reminds students of the
importance of interes
t expense, dividends, and other key financial statement items necessary for
completing the WACC calculation. As students begin to click the sequence of macro buttons,
they can track the calculations for r
When students ac
tivate the r
visualize the importance of average debt, income tax expense, and income (before taxes) in
deriving r
D
(Morrison Analytics, 20
methods for calculating r
E
. As students click the final macro button, the spreadsheet reveals a
summary table for WACC using both the CAPM method (WACC
growth model (WACC-
DIV). Students can identify how the method used to derive r
WACC.
Journal of Finance and Accountancy
An Interactive Approach, Page
calculation of WACC by incorporating
spinner buttons (“spinners”)
. These buttons allow
in
one or more variables within the WACC equation impact the
ion of WACC. Because students do not need to perform calculations or
gather information, they are able to focus on expanding their knowledge of the WACC formula
and recognizing several factors that influence WACC.
The spreadsheet consists of three exhibits
. Exhibit 1A allows students to become familiar
with the financial statement and market data that drive the WACC calculation. The exhibit
highlights the differences between book and market values since both valuations are used by
mination of WACC (Truong, Partington, & Peat, 2008). Exhibit 2A
builds on the previous exhibit by reflecting cost of debt on a pre
-tax and post-
tax basis and
presenting the cost of equity under the CAPM and dividend
-
growth (DIV) models. Exhibit 3A
udents the opportunity, through the use of
spinners
, to make changes to the base factors
that affect the cost of debt and the cost of equity under both the CAPM and DIV models.
Students can also modify the strategic mix of debt and equity. Further detail o
n the features of
Exhibit 1A and Exhibit 1B: Weights of debt (w
D
) and equity (w
E
)
As indicated in Exhibit 1A (Appendix), the spreadsheet contains financial statement
information with embedded macro buttons, prompting students to
calculate the book value
weights and market value weights of debt and equity, respectively. As indicated in Exhibit 1B
(Appendix), the macro buttons trigger book value calculations, market value calculations, and a
respectively
. The color-
coded cells within the spreadsheet help
students identify the source for each calculation. Within this first worksheet, all students have a
common starting point for WACC calculations as they tie WACC back to financial statement
uctors may wish to prompt students to consider how a change in a firm’s stock
price or the number of shares outstanding impacts w
D
and w
E
.
Exhibit 2A and Exhibit 2B: The cost of debt (r
D
) and the cost of equity (r
E
)
As indicated in Exhibit 2A (Appendix),
students click a control button to carry forward
relevant financial statement information from the first worksheet (see Exhibits 1A and 1B) to the
second worksheet. The summary schedule presented in Exhibit 2A reminds students of the
t expense, dividends, and other key financial statement items necessary for
completing the WACC calculation. As students begin to click the sequence of macro buttons,
they can track the calculations for r
D
, r
E,
and WACC (see Exhibit 2B).
tivate the r
D
calculation via the embedded macro button, they can
visualize the importance of average debt, income tax expense, and income (before taxes) in
(Morrison Analytics, 20
12). Also
, Exhibit 2B presents students with two different
. As students click the final macro button, the spreadsheet reveals a
summary table for WACC using both the CAPM method (WACC
-
CAPM) and the dividend
DIV). Students can identify how the method used to derive r
Journal of Finance and Accountancy
An Interactive Approach, Page
5
. These buttons allow
one or more variables within the WACC equation impact the
ion of WACC. Because students do not need to perform calculations or
gather information, they are able to focus on expanding their knowledge of the WACC formula
. Exhibit 1A allows students to become familiar
with the financial statement and market data that drive the WACC calculation. The exhibit
highlights the differences between book and market values since both valuations are used by
mination of WACC (Truong, Partington, & Peat, 2008). Exhibit 2A
tax basis and
growth (DIV) models. Exhibit 3A
, to make changes to the base factors
that affect the cost of debt and the cost of equity under both the CAPM and DIV models.
n the features of
As indicated in Exhibit 1A (Appendix), the spreadsheet contains financial statement
calculate the book value
weights and market value weights of debt and equity, respectively. As indicated in Exhibit 1B
(Appendix), the macro buttons trigger book value calculations, market value calculations, and a
coded cells within the spreadsheet help
students identify the source for each calculation. Within this first worksheet, all students have a
common starting point for WACC calculations as they tie WACC back to financial statement
uctors may wish to prompt students to consider how a change in a firm’s stock
students click a control button to carry forward
relevant financial statement information from the first worksheet (see Exhibits 1A and 1B) to the
second worksheet. The summary schedule presented in Exhibit 2A reminds students of the
t expense, dividends, and other key financial statement items necessary for
completing the WACC calculation. As students begin to click the sequence of macro buttons,
calculation via the embedded macro button, they can
visualize the importance of average debt, income tax expense, and income (before taxes) in
, Exhibit 2B presents students with two different
. As students click the final macro button, the spreadsheet reveals a
CAPM) and the dividend
DIV). Students can identify how the method used to derive r
E
impacts
Exhibit 3A and Exhibit 3B: Computing variations to WACC (w
As indicated in Exhibit 3A (Appendix), students click a control button to carry forward r
and r
E
from the second worksheet and redisplay the WACC calculations. The starting point for
the spinners
aligns the original inputs and the solutions from Exhibit 2B. Students
recognize that the WACC calculation they explored through the previous
WACC calculation derived via the spinners. Next, students use the
changes in one or more variables impact the output. Initially, the
presented in earlier exhibits. Using the
in the tax rate leads to an increase in r
company’s beta leads to an increase in r
note that a
change in dividends would only impact WACC
the “clear all” button to return to the summary table of results.
OPPORTUNITIES IN TEACHING WACC
Krishnan, et al. (1999) considered the scope of material available for the
finance class and suggested it “would be impossible to do justice to all topics in a one
course” (p. 80) and recommended “keeping coverage practical and simple” (p. 81). According to
Parrott (2009), WACC appears to be a straightforwa
limit coverage through a streamlined approach. However, the WACC equation plays a pivotal
role in the introductory course and detailed coverage of the topic through an interactive
spreadsheet serves several purpos
Create a bridge between introductory finance topics
Highlighting WACC serves as a bridge between multiple topics within the course.
Faculty will have covered TVM early in the introductory course, and a study of WACC
reinforces its central role for d
iscounting cash flows. In TVM analysis, students learned how to
use the present value tool to assess projects. Students can now learn how and why WACC
represents an appropriate discount rate. Later in the course, faculty typically cover capital
budgeting t
hrough which students learn to calculate net present value (NPV) under various
scenarios. By understanding what drives changes in WACC, students begin to appreciate the
effect on NPV. The WACC formula also reinforces the dividend growth model developed in
finance course’s stock valuation material. If faculty decide to engage students in a review of
capital structure theory, knowledge of WACC supports their understanding of operating income
(EBIT), interest expense, and leverage.
Students appreciate “bo
undary
Instructors could choose to briefly discuss applications of WACC in other fields, such as the
mutual insurance industry (Adelman & Cross, 2005) or the hospitality industry (Jung, 2007).
This may prom
ote relevance to the general business major. Instructors can expose students to
excerpts from Fama and French (
which identify how practitioners apply WACC to solve business problems. From the Truong
al. survey, students learn that WACC is “widely used” (p. 98) as a discount rate. They also learn
that 60% of practitioners use expected weightings of debt and equity to calculate WACC, 51%
use the market value of financial instruments, and 69% adjust f
Journal of Finance and Accountancy
An Interactive Approach, Page
Exhibit 3A and Exhibit 3B: Computing variations to WACC (w
D
r
D
(1-
t) + w
As indicated in Exhibit 3A (Appendix), students click a control button to carry forward r
from the second worksheet and redisplay the WACC calculations. The starting point for
aligns the original inputs and the solutions from Exhibit 2B. Students
recognize that the WACC calculation they explored through the previous
worksheet matches the
WACC calculation derived via the spinners. Next, students use the
spinners
to identify how
changes in one or more variables impact the output. Initially, the
spinners
reflect the base case as
presented in earlier exhibits. Using the
spinners, students can observe,
for example, that a decline
in the tax rate leads to an increase in r
D
and an increase in WACC, or that an increase in a
company’s beta leads to an increase in r
E
and an increase in WACC. In addition, students may
change in dividends would only impact WACC
-
DIV. At any point, students can click
the “clear all” button to return to the summary table of results.
OPPORTUNITIES IN TEACHING WACC
Krishnan, et al. (1999) considered the scope of material available for the
finance class and suggested it “would be impossible to do justice to all topics in a one
course” (p. 80) and recommended “keeping coverage practical and simple” (p. 81). According to
Parrott (2009), WACC appears to be a straightforwa
rd concept and faculty might be tempted to
limit coverage through a streamlined approach. However, the WACC equation plays a pivotal
role in the introductory course and detailed coverage of the topic through an interactive
spreadsheet serves several purpos
es.
Create a bridge between introductory finance topics
Highlighting WACC serves as a bridge between multiple topics within the course.
Faculty will have covered TVM early in the introductory course, and a study of WACC
iscounting cash flows. In TVM analysis, students learned how to
use the present value tool to assess projects. Students can now learn how and why WACC
represents an appropriate discount rate. Later in the course, faculty typically cover capital
hrough which students learn to calculate net present value (NPV) under various
scenarios. By understanding what drives changes in WACC, students begin to appreciate the
effect on NPV. The WACC formula also reinforces the dividend growth model developed in
finance course’s stock valuation material. If faculty decide to engage students in a review of
capital structure theory, knowledge of WACC supports their understanding of operating income
(EBIT), interest expense, and leverage.
undary
-
spanning business thinking” (AACSB, 2002, p. 20).
Instructors could choose to briefly discuss applications of WACC in other fields, such as the
mutual insurance industry (Adelman & Cross, 2005) or the hospitality industry (Jung, 2007).
ote relevance to the general business major. Instructors can expose students to
excerpts from Fama and French (
1992
) and a study by Truong, Partington, and Peat (2008)
which identify how practitioners apply WACC to solve business problems. From the Truong
al. survey, students learn that WACC is “widely used” (p. 98) as a discount rate. They also learn
that 60% of practitioners use expected weightings of debt and equity to calculate WACC, 51%
use the market value of financial instruments, and 69% adjust f
or the interest rate shield on debt.
Journal of Finance and Accountancy
An Interactive Approach, Page
6
t) + w
E
r
E
)
As indicated in Exhibit 3A (Appendix), students click a control button to carry forward r
D
from the second worksheet and redisplay the WACC calculations. The starting point for
aligns the original inputs and the solutions from Exhibit 2B. Students
should readily
worksheet matches the
to identify how
reflect the base case as
for example, that a decline
and an increase in WACC, or that an increase in a
and an increase in WACC. In addition, students may
DIV. At any point, students can click
introductory
finance class and suggested it “would be impossible to do justice to all topics in a one
-semester
course” (p. 80) and recommended “keeping coverage practical and simple” (p. 81). According to
rd concept and faculty might be tempted to
limit coverage through a streamlined approach. However, the WACC equation plays a pivotal
role in the introductory course and detailed coverage of the topic through an interactive
Highlighting WACC serves as a bridge between multiple topics within the course.
Faculty will have covered TVM early in the introductory course, and a study of WACC
iscounting cash flows. In TVM analysis, students learned how to
use the present value tool to assess projects. Students can now learn how and why WACC
represents an appropriate discount rate. Later in the course, faculty typically cover capital
hrough which students learn to calculate net present value (NPV) under various
scenarios. By understanding what drives changes in WACC, students begin to appreciate the
effect on NPV. The WACC formula also reinforces the dividend growth model developed in
the
finance course’s stock valuation material. If faculty decide to engage students in a review of
capital structure theory, knowledge of WACC supports their understanding of operating income
spanning business thinking” (AACSB, 2002, p. 20).
Instructors could choose to briefly discuss applications of WACC in other fields, such as the
mutual insurance industry (Adelman & Cross, 2005) or the hospitality industry (Jung, 2007).
ote relevance to the general business major. Instructors can expose students to
) and a study by Truong, Partington, and Peat (2008)
which identify how practitioners apply WACC to solve business problems. From the Truong
et
al. survey, students learn that WACC is “widely used” (p. 98) as a discount rate. They also learn
that 60% of practitioners use expected weightings of debt and equity to calculate WACC, 51%
or the interest rate shield on debt.
Finally, instructors can emphasize the role of CAPM within the WACC equation and how
academics
struggle to derive a good estimate for the market rate of return (Rogers, 2009).
Brigham (as cited in Gup, 1994) stated stud
does not produce neat, precise answers” (p. 108). Carrithers, Lin
against well-
structured problems with right answers and instead advocated ill
“messy” problems that te
ach critical thinking skills. Given the breadth of cost of capital
applications by practitioners, students benefit by exploring a full range of concepts rather than
solving for a single solution to WACC.
Clarify the importance of the discount rate
Intro
ductory finance textbooks typically provide the rate used to discount cash flows
within TVM and capital budgeting problems. After performing numerous present value
calculations, students might be left with the impression that the associated discount rate i
given or that a single, “correct” rate exists. Exploring WACC provides instructors with an
opportunity to clarify the importance of discount rates and present the detail embedded in the
WACC formula. Similarly, exploring WACC allows students to c
discounting with a financial manager’s debt
Highlight financial relationships
Coverage of the WACC formula gives instructors the opportunity to (1) introduce
students to balance sheet and income statement information, (2) highlight differences between
book and market values, and (3) illustrate how managers extract relevant data from
statements for decision-
making purposes.
THE ASSIGNMENT
By emphasizing the relationship between financial statement items and WACC, this
assignment forces a student to assume the role of a financial manager and consider how a change
in various
factors might impact WACC. Because the spreadsheet reveals calculations in a step
by-
step fashion, students can spend time reflecting on the significance of their findings rather
than becoming frustrated or lost in a myriad of calculations.
The assignment
consists of two sections. In the first section, students begin with a
WACC-
CAPM of approximately 8% (i.e., the base case) and use
increases and decreases in CAPM variables impact WACC. In the second section, students begin
with a WACC-
DIV of approximately
dividend growth model variables impact WACC. To complete the assignment, students prepare a
written report on their findings. The instructor can also fol
student results. The specific assignment steps are presented below:
Section I: Calculating WACC using CAPM (WACC
1.
The CFO anticipates that WACC (based upon the CAPM method) will increase from the
rate presented in the base case (approxima
Factors which may impact WACC
a.
The cost of debt (r
Journal of Finance and Accountancy
An Interactive Approach, Page
Finally, instructors can emphasize the role of CAPM within the WACC equation and how
struggle to derive a good estimate for the market rate of return (Rogers, 2009).
Brigham (as cited in Gup, 1994) stated stud
ents must understand “the CAPM in the real world
does not produce neat, precise answers” (p. 108). Carrithers, Lin
g
, and Bean (2008) argued
structured problems with right answers and instead advocated ill
-
structured or
ach critical thinking skills. Given the breadth of cost of capital
applications by practitioners, students benefit by exploring a full range of concepts rather than
solving for a single solution to WACC.
Clarify the importance of the discount rate
ductory finance textbooks typically provide the rate used to discount cash flows
within TVM and capital budgeting problems. After performing numerous present value
calculations, students might be left with the impression that the associated discount rate i
given or that a single, “correct” rate exists. Exploring WACC provides instructors with an
opportunity to clarify the importance of discount rates and present the detail embedded in the
WACC formula. Similarly, exploring WACC allows students to c
onnect the rate used for
discounting with a financial manager’s debt
-equity decisions.
Highlight financial relationships
Coverage of the WACC formula gives instructors the opportunity to (1) introduce
students to balance sheet and income statement information, (2) highlight differences between
book and market values, and (3) illustrate how managers extract relevant data from
making purposes.
By emphasizing the relationship between financial statement items and WACC, this
assignment forces a student to assume the role of a financial manager and consider how a change
factors might impact WACC. Because the spreadsheet reveals calculations in a step
step fashion, students can spend time reflecting on the significance of their findings rather
than becoming frustrated or lost in a myriad of calculations.
consists of two sections. In the first section, students begin with a
CAPM of approximately 8% (i.e., the base case) and use
spinners
to explore how
increases and decreases in CAPM variables impact WACC. In the second section, students begin
DIV of approximately
8% and again use spinners
to explore how changes in
dividend growth model variables impact WACC. To complete the assignment, students prepare a
written report on their findings. The instructor can also fol
low
up with a classroom di
student results. The specific assignment steps are presented below:
Section I: Calculating WACC using CAPM (WACC
-CAPM)
The CFO anticipates that WACC (based upon the CAPM method) will increase from the
rate presented in the base case (approxima
tely 8%) to approximately 20% next year.
Factors which may impact WACC
-CAPM next year include:
The cost of debt (r
D
)
Journal of Finance and Accountancy
An Interactive Approach, Page
7
Finally, instructors can emphasize the role of CAPM within the WACC equation and how
struggle to derive a good estimate for the market rate of return (Rogers, 2009).
ents must understand “the CAPM in the real world
, and Bean (2008) argued
structured or
ach critical thinking skills. Given the breadth of cost of capital
applications by practitioners, students benefit by exploring a full range of concepts rather than
ductory finance textbooks typically provide the rate used to discount cash flows
within TVM and capital budgeting problems. After performing numerous present value
calculations, students might be left with the impression that the associated discount rate i
s always
given or that a single, “correct” rate exists. Exploring WACC provides instructors with an
opportunity to clarify the importance of discount rates and present the detail embedded in the
onnect the rate used for
Coverage of the WACC formula gives instructors the opportunity to (1) introduce
students to balance sheet and income statement information, (2) highlight differences between
book and market values, and (3) illustrate how managers extract relevant data from
financial
By emphasizing the relationship between financial statement items and WACC, this
assignment forces a student to assume the role of a financial manager and consider how a change
factors might impact WACC. Because the spreadsheet reveals calculations in a step
-
step fashion, students can spend time reflecting on the significance of their findings rather
consists of two sections. In the first section, students begin with a
to explore how
increases and decreases in CAPM variables impact WACC. In the second section, students begin
to explore how changes in
dividend growth model variables impact WACC. To complete the assignment, students prepare a
up with a classroom di
scussion of
The CFO anticipates that WACC (based upon the CAPM method) will increase from the
tely 8%) to approximately 20% next year.
b.
The corporate tax rate (T
c. The risk-
free rate (r
d.
The market risk (β
e.
The market rate of return (r
Using spinners
, adjust each of the
they impact WACC-
CAPM.
2.
Returning to the base case with the “Clear All” button, minimize and maximize one of
the aforementioned factors and comment on the effect of that variable on WACC
3. Returning to
the base case, minimize and maximize a different factor. Comment on the
sensitivity of that variable on WACC
Section II: Calculating WACC using the dividend growth model (WACC
1.
The CFO anticipates that WACC (based upon the dividend growth
from the rate presented i
n the base case (approximately
year. Factors which may impact WACC
a.
The cost of debt (r
b.
The corporate tax rate (T
c. The dividend rate
d.
Current stock pric
e.
Growth rate in dividends (g)
Using spinners
, adjust each of the aforementioned factors and briefly comment on how
they impact WACC-
DIV.
2.
Returning to the base case with the “Clear All” button, minimize and maximize one of
the aforementioned factors a
Returning to the base case, minimize and maximize a different factor. Comment on the
sensitivity of that variable on WACC
SAMPLE STUDENT RESULTS
To assess student understanding of WACC, the ins
students within a small introductory finance class. Prior to its distribution, the instructor
motivated students by dedicating class time to the importance of the discount rate within the
bond and stock valuation mode
ls developed earlier in the course. In addition, the instructor
emphasized the importance of WACC to future topics such as capital budgeting, cash flow and
risk analysis, and valuation-
based management models (i.e., adjusted present valuation
techniques).
The students were provided one week to complete the assignment. The student
deliverables included electronic submittal of spreadsheet results to the instructor and a brief
narrative of their findings.
Student commentaries signaled a level of discomfort wit
students correctly identified which factors directly (e.g., r
impacted WACC, the typical student response only highlighted numerical relationships (e.g., if
r
M
increased by 1%, then WACC
sample student results.
Journal of Finance and Accountancy
An Interactive Approach, Page
The corporate tax rate (T
C
)
free rate (r
RF
)
The market risk (β)
The market rate of return (r
M
)
, adjust each of the
aforementioned factors and briefly comment on how
CAPM.
Returning to the base case with the “Clear All” button, minimize and maximize one of
the aforementioned factors and comment on the effect of that variable on WACC
the base case, minimize and maximize a different factor. Comment on the
sensitivity of that variable on WACC
-CAPM.
Section II: Calculating WACC using the dividend growth model (WACC
-
DIV)
The CFO anticipates that WACC (based upon the dividend growth
model) will increase
n the base case (approximately
8%) to approximately 20% next
year. Factors which may impact WACC
-DIV next year may include:
The cost of debt (r
D
)
The corporate tax rate (T
C
)
Current stock pric
e (P)
Growth rate in dividends (g)
, adjust each of the aforementioned factors and briefly comment on how
DIV.
Returning to the base case with the “Clear All” button, minimize and maximize one of
the aforementioned factors a
nd comment on the effect of that variable on WACC
Returning to the base case, minimize and maximize a different factor. Comment on the
sensitivity of that variable on WACC
-DIV.
SAMPLE STUDENT RESULTS
To assess student understanding of WACC, the ins
tructor distributed the spreadsheet to
students within a small introductory finance class. Prior to its distribution, the instructor
motivated students by dedicating class time to the importance of the discount rate within the
ls developed earlier in the course. In addition, the instructor
emphasized the importance of WACC to future topics such as capital budgeting, cash flow and
based management models (i.e., adjusted present valuation
The students were provided one week to complete the assignment. The student
deliverables included electronic submittal of spreadsheet results to the instructor and a brief
Student commentaries signaled a level of discomfort wit
h WACC concepts.
students correctly identified which factors directly (e.g., r
M
) and inversely (e.g., stock prices)
impacted WACC, the typical student response only highlighted numerical relationships (e.g., if
increased by 1%, then WACC
-CAPM increased by 0.5%).
Exhibit 4 (Appendix) presents
Journal of Finance and Accountancy
An Interactive Approach, Page
8
aforementioned factors and briefly comment on how
Returning to the base case with the “Clear All” button, minimize and maximize one of
the aforementioned factors and comment on the effect of that variable on WACC
-CAPM.
the base case, minimize and maximize a different factor. Comment on the
DIV)
model) will increase
8%) to approximately 20% next
, adjust each of the aforementioned factors and briefly comment on how
Returning to the base case with the “Clear All” button, minimize and maximize one of
nd comment on the effect of that variable on WACC
-DIV.
Returning to the base case, minimize and maximize a different factor. Comment on the
tructor distributed the spreadsheet to
students within a small introductory finance class. Prior to its distribution, the instructor
motivated students by dedicating class time to the importance of the discount rate within the
ls developed earlier in the course. In addition, the instructor
emphasized the importance of WACC to future topics such as capital budgeting, cash flow and
based management models (i.e., adjusted present valuation
The students were provided one week to complete the assignment. The student
deliverables included electronic submittal of spreadsheet results to the instructor and a brief
h WACC concepts.
Although
) and inversely (e.g., stock prices)
impacted WACC, the typical student response only highlighted numerical relationships (e.g., if
Exhibit 4 (Appendix) presents
Section I: Student Results
(WACC
Student results suggested proficiency in adjusting CAPM variables to achieve an increase
in WACC from roughly 8% to 20%. Students noted the
cost of debt calculation. More specifically, many recognized interest expense is tax deductible on
bonds and that as the tax rate increases, debt becomes less costly, and WACC
Using the spinners, student
adjustments. One student noted that r
find in the market, usually expressed as the return on Treasury bonds.”
t
he student suggested Treasury rates set the economy’s floor for interest rates and that changes
do not necessarily change the market risk premium. He
firms reduce spending. This, in turn, will lower
premium stable.
A third student noted that a “high” beta (greater than 1.0) implies a firm’s stock adds
more risk to a well-
diversified portfolio. The student noted the higher the beta, the higher the
required return for inve
stors, leading to a higher WACC
When describing WACC
-
abstract theory presented in the chapter preceding WACC. Students gained insight into how
CAPM could be used by analysts and how changing the i
For example, Brigham and Houston (2013) indicated that the value used to represent r
a significant effect on the calculated beta.
Section II: Student Results
(WACC
Regarding WACC-
DIV, students recognized
increase dividends leads to a higher cost of equity. Students also recognized that a higher stock
price implied that the dividend yield (D
pressure on WACC-DIV.
When students attempted to minimize and maximize variables simultaneously, their
comments reinforced their lack of comfort with the WACC equation. Exploring WACC through
an interactive worksheet provided students with a view of its complexities. Students
that if a financial manager increases the proportion of debt, then the weight of low
increases and the weight of high
-
the assignment and asked for student feedback, stu
changing the capital structure impacts all variables in the WACC equation.
Student Review
After distributing results to the students, the instructor asked them to participate in a 15
minute discussion about the
assignment before proceeding to capital budgeting. Students
observed that while the WACC formula is fairly straightforward, the spreadsheet provoked them
to comment on relationships between key components and WACC. One student commented,
“This spreadsheet
forces a student to think like a financial manager and what happens to WACC
if a recession occurs and r
M
falls.” Another student indicated that instead of busily solving
equations via Excel or a financial calculator, he gained an appreciation for complicat
capital issues that managers might face in the boardroom.
Journal of Finance and Accountancy
An Interactive Approach, Page
(WACC
-CAPM)
Student results suggested proficiency in adjusting CAPM variables to achieve an increase
in WACC from roughly 8% to 20%. Students noted the
tax rate plays a fundamental role in the
cost of debt calculation. More specifically, many recognized interest expense is tax deductible on
bonds and that as the tax rate increases, debt becomes less costly, and WACC
-
CAPM falls.
Using the spinners, student
s noticed little change in WACC due to risk-
free rate (r
adjustments. One student noted that r
RF
reflects the return on “the least risky investment one can
find in the market, usually expressed as the return on Treasury bonds.”
Within his commentary,
he student suggested Treasury rates set the economy’s floor for interest rates and that changes
do not necessarily change the market risk premium. He
further
suggested that during a recession,
firms reduce spending. This, in turn, will lower
r
RF
and r
M
tog
ether, keeping the market risk
A third student noted that a “high” beta (greater than 1.0) implies a firm’s stock adds
diversified portfolio. The student noted the higher the beta, the higher the
stors, leading to a higher WACC
-CAPM.
-
CAPM, students recognized that CAPM is more than just
abstract theory presented in the chapter preceding WACC. Students gained insight into how
CAPM could be used by analysts and how changing the i
nputs impact the WACC calculation.
For example, Brigham and Houston (2013) indicated that the value used to represent r
a significant effect on the calculated beta.
(WACC
-DIV)
DIV, students recognized
that a financial manager’s decision to
increase dividends leads to a higher cost of equity. Students also recognized that a higher stock
price implied that the dividend yield (D
1
/P) would fall, everything else equal, placing downward
When students attempted to minimize and maximize variables simultaneously, their
comments reinforced their lack of comfort with the WACC equation. Exploring WACC through
an interactive worksheet provided students with a view of its complexities. Students
that if a financial manager increases the proportion of debt, then the weight of low
-
cost equity (w
E
) falls. However, after the instructor collected
the assignment and asked for student feedback, stu
dents were tentative in acknowledging that
changing the capital structure impacts all variables in the WACC equation.
After distributing results to the students, the instructor asked them to participate in a 15
assignment before proceeding to capital budgeting. Students
observed that while the WACC formula is fairly straightforward, the spreadsheet provoked them
to comment on relationships between key components and WACC. One student commented,
forces a student to think like a financial manager and what happens to WACC
falls.” Another student indicated that instead of busily solving
equations via Excel or a financial calculator, he gained an appreciation for complicat
capital issues that managers might face in the boardroom.
Journal of Finance and Accountancy
An Interactive Approach, Page
9
Student results suggested proficiency in adjusting CAPM variables to achieve an increase
tax rate plays a fundamental role in the
cost of debt calculation. More specifically, many recognized interest expense is tax deductible on
CAPM falls.
free rate (r
RF
)
reflects the return on “the least risky investment one can
Within his commentary,
he student suggested Treasury rates set the economy’s floor for interest rates and that changes
suggested that during a recession,
ether, keeping the market risk
A third student noted that a “high” beta (greater than 1.0) implies a firm’s stock adds
diversified portfolio. The student noted the higher the beta, the higher the
CAPM, students recognized that CAPM is more than just
abstract theory presented in the chapter preceding WACC. Students gained insight into how
nputs impact the WACC calculation.
For example, Brigham and Houston (2013) indicated that the value used to represent r
M
can have
that a financial manager’s decision to
increase dividends leads to a higher cost of equity. Students also recognized that a higher stock
/P) would fall, everything else equal, placing downward
When students attempted to minimize and maximize variables simultaneously, their
comments reinforced their lack of comfort with the WACC equation. Exploring WACC through
an interactive worksheet provided students with a view of its complexities. Students
surmised
that if a financial manager increases the proportion of debt, then the weight of low
-cost debt (w
D
)
) falls. However, after the instructor collected
dents were tentative in acknowledging that
After distributing results to the students, the instructor asked them to participate in a 15
-
assignment before proceeding to capital budgeting. Students
observed that while the WACC formula is fairly straightforward, the spreadsheet provoked them
to comment on relationships between key components and WACC. One student commented,
forces a student to think like a financial manager and what happens to WACC
falls.” Another student indicated that instead of busily solving
equations via Excel or a financial calculator, he gained an appreciation for complicat
ed cost of
During this exercise, students recognized that the cost of capital is affected by factors that
are outside of
a firm’s control. These include stock prices, the market risk premium, and t
set by Congress (Brigham & Houston, 2013). Students also recog
control over
internal factors such as
CONCLUSION
AND FUTURE RECOMMENDATIONS
Hamilton and Saunders (2009)
level appropriate to a university’s curriculum and course objectives. Such activities should assist
students in developing the decision
in t
he learning (and application) of finance concepts regardless of a student’s major. Through an
interactive, exploratory process, this assignment represents a step in that direction. In the
assignment, an Excel spreadsheet serves as a “bridge” between the bo
chapters using TVM and chapters culminating the introductory course (e.g., capital budgeting,
cash flow estimation). The spreadsheet provides a sequential approach for calculating WACC
which is appropriate for the Net Gen student. Th
how incremental changes in various factors impact WACC. By deemphasizing WACC
calculations in favor of testing the effect of changes in the formula, the spreadsheet encourages
students to identify directional
relationships. The assignment presents instructors with an
opportunity to develop student knowledge and appreciation of WACC without a significant
commitment of class time.
Future extensions to the WACC assignment include the following:
1. Present financial
statements for a firm with multiple divisions and ask students to
calculate and compare divisional WACCs.
2.
Include preferred stock within the calculation.
3.
Require students to research
components (i.e., r
RF
, r
4.
Require students to use financial statements and
theory.
5.
Alter the assignment so that students derive the WACC curv
debt and identify the point at which a firm maximizes its value by minimizing
WACC.
Journal of Finance and Accountancy
An Interactive Approach, Page
During this exercise, students recognized that the cost of capital is affected by factors that
a firm’s control. These include stock prices, the market risk premium, and t
set by Congress (Brigham & Houston, 2013). Students also recog
nized that a firm can exercise
internal factors such as
its capital structure and its dividend policy.
AND FUTURE RECOMMENDATIONS
Hamilton and Saunders (2009)
called for more student-
centric learning activities at a
level appropriate to a university’s curriculum and course objectives. Such activities should assist
students in developing the decision
-
making skills needed in the workplace and engage students
he learning (and application) of finance concepts regardless of a student’s major. Through an
interactive, exploratory process, this assignment represents a step in that direction. In the
assignment, an Excel spreadsheet serves as a “bridge” between the bo
nd and stock valuation
chapters using TVM and chapters culminating the introductory course (e.g., capital budgeting,
cash flow estimation). The spreadsheet provides a sequential approach for calculating WACC
which is appropriate for the Net Gen student. Th
rough the use of spinners, students can witness
how incremental changes in various factors impact WACC. By deemphasizing WACC
calculations in favor of testing the effect of changes in the formula, the spreadsheet encourages
relationships. The assignment presents instructors with an
opportunity to develop student knowledge and appreciation of WACC without a significant
Future extensions to the WACC assignment include the following:
statements for a firm with multiple divisions and ask students to
calculate and compare divisional WACCs.
Include preferred stock within the calculation.
Require students to research
financial statements for a firm
and import key
, r
M
) using reputable sources.
Require students to use financial statements and
spinners
to illustrate the trade
Alter the assignment so that students derive the WACC curv
e under various levels of
debt and identify the point at which a firm maximizes its value by minimizing
Journal of Finance and Accountancy
An Interactive Approach, Page
10
During this exercise, students recognized that the cost of capital is affected by factors that
a firm’s control. These include stock prices, the market risk premium, and t
ax rates
nized that a firm can exercise
centric learning activities at a
level appropriate to a university’s curriculum and course objectives. Such activities should assist
making skills needed in the workplace and engage students
he learning (and application) of finance concepts regardless of a student’s major. Through an
interactive, exploratory process, this assignment represents a step in that direction. In the
nd and stock valuation
chapters using TVM and chapters culminating the introductory course (e.g., capital budgeting,
cash flow estimation). The spreadsheet provides a sequential approach for calculating WACC
rough the use of spinners, students can witness
how incremental changes in various factors impact WACC. By deemphasizing WACC
calculations in favor of testing the effect of changes in the formula, the spreadsheet encourages
relationships. The assignment presents instructors with an
opportunity to develop student knowledge and appreciation of WACC without a significant
statements for a firm with multiple divisions and ask students to
and import key
to illustrate the trade
-off
e under various levels of
debt and identify the point at which a firm maximizes its value by minimizing
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APPENDIX
Exhibit 1A
Journal of Finance and Accountancy
An Interactive Approach, Page
C. (2005). The student’s perspective. In D. Oblinger and J. Oblinger (Eds.),
eneration
(pp. 5.1-
5.16). Washington D.C.: Educause.
Journal of Finance and Accountancy
An Interactive Approach, Page
13
C. (2005). The student’s perspective. In D. Oblinger and J. Oblinger (Eds.),
5.16). Washington D.C.: Educause.
Exhibit 1B
Journal of Finance and Accountancy
An Interactive Approach, Page
Journal of Finance and Accountancy
An Interactive Approach, Page
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Exhibit 2A
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An Interactive Approach, Page
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Exhibit 2B
Journal of Finance and Accountancy
An Interactive Approach, Page
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An Interactive Approach, Page
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Exhibit 3A
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An Interactive Approach, Page
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An Interactive Approach, Page
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Exhibit 3B
Journal of Finance and Accountancy
An Interactive Approach, Page
Journal of Finance and Accountancy
An Interactive Approach, Page
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Exhibit 4
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An Interactive Approach, Page
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