Cost of Capital Firms need to make capital investment i.e.‚ purchasing fixed assets such as factories‚ machineries‚ equipment‚ etc. After deciding what capital investments to make‚ they need to decide on the financing – sources of capital. The sources: Long-Term Debt‚ Common Stock‚ Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not historical). Cost of Capital - The rate of return that a firm must earn on its investment
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MBA 203: Problem Set 4 Cost of Capital at Ameritrade Due: Wednesday‚ November 28‚ 2012‚ by 9:00 a.m. The course material covered in weeks 4 and 5 should be sufficient for doing this problem set. The questions below are for the Cost of Capital at Ameritrade case in your course packet. You can find the data for this case on the course website in a spreadsheet named Ameritrade.xls. Please turn in your problem set solutions by posting them to bSpace as an Excel file or pdf file. Upload a single solution
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Executive Summary As a Deep-Discount Brokerage firm‚ Ameritrade Holding Corporation (AHC) plans to invest in advertising and technology in order to increase their consumer base and thus revenues. The purpose of this report is to assess the riskiness of the proposed investments by considering the project’s cost of capital calculated via the Capital Asset Pricing Model (CAPM). A range of factors will be considered in order to assess each possible variable that may influence the result. Areas of focus
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WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER 1) From the SEC website‚ the balance sheet of Dell Computer reveals a Book value of debt = $3‚394‚000‚000 and Book value of equity = $4‚625‚000‚000 The same balance shows the breakdown of the long-term debt (book values) in table 1. Table 1 Coupon Rate (%) Maturity Book Value (Face Value in million $) 3.38 06/15/2012 400 4.70 04/15/2013 599 5.63 04/15/2014 500 5.65 04/15/2018 499 5.88 06/15/2019 600 7.10 04/15/2028 396 6
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What is cost of capital? The cost of capital is the cost of obtaining funds‚ through debt or equity‚ in order to finance an investment. It is used to evaluate new projects of a company‚ as it is the minimum return that investors expect for providing capital to the company‚ thus setting a benchmark that a new project has to meet. Importance The concept of cost of capital is a major standard for comparison used in finance decisions. Acceptance or rejection of an investment project depends on the
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Solutions to Chapter 12 The Cost of Capital 1. The yield to maturity for the bonds (since maturity is now 19 years) is the interest rate (r) that is the solution to the following equation: [$80 annuity factor(r‚ 19 years)] + [$1‚000/(1 + r)19] = $1‚050 Using a financial calculator‚ enter: n = 19‚ FV = 1000‚ PV = (-)1050‚ PMT = 90‚ and then compute i = 7.50% Therefore‚ the after-tax cost of debt is: 7.50% (1 – 0.35) = 4.88% 2. r = DIV/P0 = $4/$40 = 0.10 = 10% 3. = [0.3 7.50% (1
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When You’ve Got to Cut Costs A practical guide to reducing overhead by 10%‚ 20%‚ or (wince) 30% by Kevin P. Coyne‚ Shawn T. Coyne‚ and Edward J. Coyne‚ Sr. 74 Harvard Business Review May 2010 HBR.ORG Kevin P. Coyne (kevin@ thecoynepartnership.com) is a professor at Emory University’s Goizueta Business School and a former senior partner at McKinsey & Company. Shawn T. Coyne (shawn@ thecoynepartnership.com) is a consultant specializing in innovation‚ marketing‚ and organizational leadership
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is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an investment
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Analysis 1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? a. Opportunity Cost – Will Ameritrade benefit from spending money on advertising and technology upgrades more than the next best alternative and more than reinvesting the money. b. Debt-to-Equity Ratio – If this ratio is high then Ameritrade may be able to generate more equity and increase earnings by more than the cost then the shareholders will
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The Cost of Capital 1 Background As investors desire to obtain the best/highest return on their investments in securities such as shares (Equity) and loans to companies such as debentures (Debt)‚ these returns are costs to the companies paying these Dividends (on equity) and Interest (on Debts)! It all depends on the perspective from which we chose to view the calculation (are we Earning or Paying?) Companies MUST consider the cost of financing they receive in the form of equity or debt if they
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