recapitalization of Wm. Wrigley Jr‚ Company which is unleveraged firm in 2002. This recapitalization with $3 billion debts increases the firm’s value and share price. On the other hand‚ it could be a risky strategy for Wrigley; therefore‚ based on our WACC analysis‚ the report indicates that it would be appropriate stretegy to have $2 billion debts instead of $3 billion. This examination also states that the firm needs to repurchase its share by the debts rather than pay dividend. 1. Introduction
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(1195) | 144 | 8260 | 24230 | 5202 | Cash Operating Taxes | 1123 | 19 | (3096) | (9028) | (2021) | Adjusted Net Operating Profit after Tax (NOPAT) | (72) | 163 | 5164 | 15202 | 3181 | Economic Value Added (Fluid Milk) = NOPAT – (EBV Capital x WACC) = (72) – (150012 x 0.1) = -15073.2 Economic Value Added (Cultured) = NOPAT –
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Chapter 14 Cost of Capital Multiple Choice Questions 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith‚ Inc. What is the return that these individuals require on this investment called? A. dividend yield B. cost of equity C. capital gains yield D. cost of capital E. income return 2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: A. compound rate. B. current yield. C. cost of debt
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Value of Operations of Constant Growth Firm EMC Corporation has never paid a dividend. Its current free cash flow of $400‚000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of operations. FCF = $400‚000 g = 5% WACC = 12% Vop = PV of expected future free cash flow Vop = = = $6‚000‚000 (13-3) Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant
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SEAT NUMBER: ……….… ROOM: .………………. FAMILY NAME.………….....…………………………. This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room. OTHER NAMES…………….…………………..…….. STUDENT NUMBER………….………..…………….. SESSION 1 EXAMINATIONS JUNE 2012 Unit: AFIN253: Financial Management Time Allowed: 2 hours plus 10 minutes reading time. Total Number of Questions: 20 Multiple Choice Questions plus 6 full response questions. Instructions: 1. PART A (60 marks):
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Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt‚ what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5‚000‚000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15‚000‚000 2‚250‚000 0 2‚250‚000 1‚350‚000 1‚000‚000 1.35
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estimate cost of capital. JOANNA COHEN’S ESTIMATION OF COST OF CAPITAL: Joanna considers the following parameters to estimate the value by using WACC‚ which are‚ whether to use single or multiple cost of capital‚ capital structure‚ cost of debt and cost of equity. SINGLE OR MULTIPLE COST OF CAPITAL To use single cost of capital for estimation of WACC is a correct approach since most products have similar risk factor and they usually complement one another. We assumed Nike Inc. to have a single
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86% | 0.586% | Weight cost of capital | | | 5.971% | 3. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts) Yes‚ because WACC is by companies for performance evaluation and planning purposes. If the weights were changed then the company would have to make the required changes to yield the proper calculations. (Weighted Average Cost of Capital (WACC)‚ 2013) 4. Recompute the net present value of the project based on the cost of capital
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Marriott use the Weighted-Average-Cost-of Capital (WACC) method to measure the opportunity cost for investments. WACC = (1-t)rD(D/V) + rE(E/V) where D and E are the market values of the debt and equity respectively; rD is the pre-tax cost of debt; rE is the after-tax cost of equity; V is the firm value (V=E+D); and t is the corporate tax. This method is applied for Marriott as the whole corporation and for each of its three lines of business. WACC is calculated based on its financial data of 1987
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Torrington from Ingersoll-Rand. This reports provides the needed information on Torrington’s worth‚ price at which Torrington could be acquired and the acquisition strategies to negotiate its deal. The evaluation uses the discounted cash flow analysis using WACC to calculate the value of Torrington worth with synergies. The value turned out to be more than the estimated minimum value of the target. The final recommendation is to proceed with the acquisition as planed which would be beneficial to the Timken
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