X. Weighted average cost of capital (WACC) The valuation of Abercrombie & Fitch Co. is based discounting future cash flows and economic profit‚ for that the weighted average cost of capital is needed. The WACC is the opportunity cost when investing in Abercrombie & Fitch Co. opposed to other investments with a similar risk. Investors want their return to excess the WACC before it can be considered a good investment; since people in general are risk averse‚ they want compensation for taking on risk
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WACC Example: A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also‚ the firm: - has 1‚000‚000 common shares outstanding - current price $11.25 per share - next year’s dividend expected to be $1 per share - firm estimates dividends will
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Approach is to analyze financial maneuvers separately and then add their value to that of the business. | APV always works when WACC does‚ and sometimes when WACC doesn’t‚ because it requires fewer restrictive assumptions | Some limitations amount to technicalities‚ which are much more interesting to academics than to managers. | | Less Prone to serious errors than WACC. | Income from stocks- as opposed to bonds- may be taxed differently when the investor files a personal tax return : this usually
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What 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? 1.1 The definition of WACC Weighted average cost of capital(WACC)‚ is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could
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Introduction Hospital Corporation of America (HCA) is a proprietary hospital management company. The company has been following an acquisitive strategy by taking over hospital companies and not-for-profit hospitals. The firm is also considering expanding into new health service areas like home health care and outpatient surgery. The company is at a crossroads with regard to its financial goals; HCA currently faces the likelihood of adverse changes to the Medicare/Medicaid policy which could strain
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http://finance.yahoo.com/ and http://www.finra.org/ I. ABOUT FEDEX CORPORATION: FedEx Corporation is a holding company. The Company provides a portfolio of transportation‚ e-commerce and business services under the FedEx brand‚ originally known as FDX Corporation‚ is an American global courier delivery services company headquartered in Memphis‚ Tennessee. FedEx Corporation is a Delaware corporation‚ incorporated October 2‚ 1997. FDX Corporation was founded in January 1998 with the acquisition of Caliber
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= 10/80 = 0.125 Common: E/V = 50/80 = 0.625 = [0.250 6% (1 – 0.35)] + [0.125 8%] + [0.625 12.0%] = 9.475% 6. Executive Fruit should use the WACC of Geothermal‚ not its own WACC‚ when evaluating an investment in geothermal power production. The risk of the project determines the discount rate‚ and in this case‚ Geothermal’s WACC is more reflective of the risk of the project in question. The proper discount rate‚ therefore‚ is not 12.3%. It is more likely to be 11.4%. 7. The flotation
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Read the case “Zychol Chemicals Corporation” given below and concisely answer the questions that follow at the end of the case study. As a general guideline‚ please try to limit your answers to a paragraph or two for each of the questions. Bob Richards‚ the production manager of Zychol Chemicals‚ in Houston‚ Texas‚ is preparing his quarterly report‚ which is to include a productivity analysis for his department. One of the inputs is production data prepared by Sharon Walford‚ his operations
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Jack in the Box decreased in re-cent years. The ratio is below one and shows a conservative attitude in operation and may slow down the growth of the company. The Calculation of WACC Table 5 Equity Debt Pref. E Weight 75.58% 24.42% 0.00% Cost 10.96% 1.84% 0.00% W x C 8.28% 0.45% 0.00% WACC 8.73% WACC=Weight of Equity * Cost of Equity+ Weight of Debt * Cost of Debt + Weight of Pre-ferred Equity* Cost of Pref. E Table 6 Cost of Debt (After-tax) 1
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American Corporation Analysis ACC/561 September 19‚ 2013 Mr. Ponteja American Corporation Analysis Wal-Mart is one of the biggest retailers not only in the United States‚ but also internationally. The corporation was founded in Arkansas by Sam Walton in 1962 and has grown to produce revenue of over $460 billion while employing 2.2 million employees (Seeking Alpha‚ 2013). Wal-Mart is known for the low cost structure and has succeeded in the retail market. Although the corporation has been successful
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