Which of the following is not associated with (or not a part of) business risk? a. Demand variability. b. Sales price variability. c. The extent to which operating costs are fixed. d. Changes in required returns due to financing decisions. e. The ability to change prices as costs change. Business risk Answer: d Diff: E N [iii]. Which of the following factors would affect a company’s business risk? a. The level of uncertainty regarding the demand for
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Cost of Capital at Ameritrade Christoph Schneider Ross School of Business Basic assumptions Tax Rate Beta Debt Leverage (D/V) Leverage (D/E) 1997 35.5% 0.25 0.00 0.00 1996 39.4% 1995 35.1% Average 36.7% Comparable companies’ βE Tax Rate Beta Debt Leverage (D/V) Leverage (D/E) Discount Brokerage Firms Charles Schwab Quick & Reilly Waterhouse Securities 1997 35.5% 1996 39.4% β E from Jan’92-Dec’96 2.30 2.20 β E from all months 2.35 2.30
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operating capital is _________ 13)An investors risky portfolio is made up of individual stocks. Which of the following statements about this portfolio is true 14)An all-equity-financed firm would __________. 15)If a firm wants to lower its weighted average cost of capital (WACC)‚ one way to do so would be to 16)Boeing is a world leader in commercial aircraft. In the face of competition‚ Boeing often faces a critical __________ decision whether to develop a new generation of passenger aircraft 17)Ideas
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market portfolio is often represented by: A. a portfolio of U.S. Treasury securities. B. a diversified stock market index. C. an investor ’s mutual fund portfolio. D. the historic record of stock market returns. 3. A stock ’s beta measures the: A. average return on the stock. B. variability in the stock ’s returns compared to that of the market portfolio. C. difference between the return on the stock and return on the market portfolio. D. market risk premium on the stock. 4. If the slope of the line
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Outstanding 5 Debt Management 6 Total liabilities to Total Assets 6 Long-Term Debt to Capital 6 Times Interest Earned (TIE) Ratio 7 Performance 7 Profit Margins 7 Return on Assets 8 Dupont Ratio 8 Bond Evaluation 9 Market Value of Debt‚ Debt Structure‚ Average maturity of Debt 9 Effect of Changing Interest Rate on Debt Market Value 10 Market Value of Equity (E) Calculation: 10 Market Value of Debt (D) Calculation: 11 The Calculation of Weighs: 12 Weight of Debt (WD) 12 Weight of Equity (WE) 12 The Advantages
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the WACC is determined by using the following equation. WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re) Where‚ Wdebt = proportion of debt in a market- value capital structure rd = pretax cost of debt capital tc = marginal effective corporate tax rate Wequity = proportion of equity in a market-value capital structure re = cost of equity capital We know from the case that: Tc = 35% Rf = 0.85% Wdebt = 44646/129686= 0.344% Wequity = 85040/129686= 0.656% From Exhibit 11‚ rd is calculated as below which is 5
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business area 2. High product quality required(high responsibility for products) 3. Legal issues Weighted Average Cost of Capital Analysis (WACC): In this case‚ we use WACC as the required rate of return to calculate the company’s net present value. The CAPM theory is being used here to find the cost of equity and yield to maturity to be its cost of debt. Cost Of Equity by Capital Asset
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Course Syllabus Modern Finance I and II Modern Finance I Professor Adel Turki‚ Cornerstone E-mail: turki@cornerstone.com Modern Finance II Professor Gordon M. Phillips‚ University of Southern California E-mail: gordon.phillips@marshall.usc.edu Web: http://www.marshall.usc.edu/faculty/directory/gordonphillips Biography: Adel Turki is a senior vice president of Cornerstone Research in Washington D.C. He received his Ph.D. from Stanford University. Dr. Turki heads the firm’s securities practice and
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Any company’s assets are either financed by its debt or by its equity. The Weighted Average Cost of Capital is the average costs of these sources of financing‚ each of which is weighted by its respective use in the given situation. By taking the weighted average‚ we can see how much interest the company has to pay for every dollar it finances. Basically‚ the WACC is the minimum required return that the company must earn to satisfy its creditors‚ owners‚ and other providers of capital‚ or they will
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Nike Inc.‚ Cost of Capital Dr. Romer Finance 3613 By: Joseph White Michael Parker NorthPoint a mutual-fund-management firm is contemplating adding Nike Inc. stocks to its Large-Cap Fund. Kimi Ford a portfolio manager for NorthPoint has developed a discounted-cash-flow forecast to help make the decision. Kimi comes to the conclusion that Nike is overvalued at its current price of $42.09 with a 12 percent cost of capital that she estimated. To determine if her estimation is correct about
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