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  "documentTitle": "Bear Stearns | Investment Banking Pitch Book | 36 slides",
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  "notes": "The slide provides the WACC formula and defines its components, along with guidance on its application in M&A contexts and capital structure assumptions.",
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      "text": "WACC = KE (E/V) + KD (1-T) (D/V) + KP (P/V)",
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      "text": "As long as you assume that initial excess cash and all interim cash flows are distributed to shareholders (i.e., no cash accumulates in the forecast period), it is appropriate to exclude cash from the WACC calculation.",
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      "text": "WACC is the weighted average of the debt and equity costs of capital (including preferred stock), using market value weights for capital structure components.",
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      "text": "WACC does not take into account a dynamic capital structure; therefore, a constant capital structure (i.e., subject company or industry average leverage) should generally be assumed. For a firm with a rapidly changing capital structure (i.e., an LBO), it may be appropriate to use a different WACC in each year of the forecast as financial leverage changes.",
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      "text": "In valuing an M&A target, use the WACC of the target company rather than the WACC of the acquiror.",
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      "text": "The weighted average cost of capital is defined as:",
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      "text": "Use a firm's after-tax, nominal WACC to discount the after-tax, nominal unlevered Free Cash Flows to the Firm.",
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      "text": "KE=cost of common equity capital. E/V=ratio of market value of common equity to total firm value. KD=cost of debt capital. D/V=ratio of market value of debt to total firm value. T=corporate marginal tax rate. KP=cost of preferred equity capital. P/V=ratio of market value of preferred equity to total firm value.",
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      "text": "Calculating the Discount Rate",
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