23 Evaluating Project Risk It’s Better to Be Safe Than Sorry! “It’s amazing how much difference there is in the way proposals are presented at two different firms‚” said John Woods to his assistant‚ Pete Madsen‚ as he pointed to the stack of capital investment proposals piled on his desk. “We sure have our work cut out for us‚ Pete. I need you to collect some data for me as soon as possible. ” John Woods‚ had recently been hired as the Assistant Vice President of Finance of Mid-West Home Products
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Case Study 4 Q1). Identify the likely characteristics of the market segment being targeted by the company. Why are most target customers likely to be foreigners rather than New Zealanders? The geographic location is quite unique seeing that it is located on the South island of New Zealand where it is very sparsely populated making it a perfect utopia from the outside world. The 28‚000 hectares of original farmland which has been converted into a big game reserve has made this a more feasible
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CAPM states that an investor’s expected rate of return equals the risk free rate plus the market risk premium weighted by beta. Managers are expected to make decisions that add to shareholder value. If the project does not provide a return greater than the investor’s expected rate of return‚ the project should not be undertaken. Additionally‚ when you use unlevered beta (asset beta) you reflect on the project risk not the company’s financing risk. 3. What is the risk-free rate that should be used
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CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores‚ Inc. 1. Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt‚ preferred stock‚ and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used
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The Boeing Company is an international aerospace and defense corporation originally founded by William E. Boeing in Seattle‚ Washington. The international corporate headquarters are now located in Chicago‚ Illinois (Boeing‚ 2009). Boeing was initially incorporated as Pacific Aero Products Company in 1916 (Boeing‚ 2009). Since 1916‚ Pacific Aero Products Company has transformed into Boeing and expanded into the largest global aircraft manufacturer by revenue‚ orders and deliveries‚ and the second
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Bus M 401 Dixon Case Estimate of WACC for Collinsville Plant The WACC for Collinsville‚ according to our estimations‚ came up to about 16.22% (Exhibit I). We took the average of the unlevered betas of comparable companies‚ 0.91‚ and relevered it according to Dixon’s target capital structure. Dixon’s 5-year historical debt ratio was 27.5%‚ but this approach would not be reliable due to its steep downturn debt ratio from 51% in 1975 to 6% in 1979. Thus‚ we thought that the best estimate of the
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cheerleading team or not. Due to her disability‚ she automatically made the team without trying out. The second question has to deal with whether Casey Martin was allowed to use the golf cart. The tournament did not let the golfers drive golf carts‚ but Casey had a disability‚ so he fought for his position of needing the golf cart for his health. The purpose of cheerleading is to cheer for the team‚ celebrate their job well done‚ and to get the fans excited. Despite Callie’s disability‚ that is exactly
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Marriott Corporation Abstract Marriott Corporation has three divisions – lodging‚ contract services and restaurants – with dissimilar operations. The company uses three separate hurdle rates for the three divisions to value the proposed projects. It is believed that this strategy is more appropriate that using a single firm-wide discount rate because the operations of the three divisions differ drastically. However‚ the company has to ensure that the company uses an appropriate discount rate for
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w rP os t S 910D05 OPERATIONS STRATEGY AT GALANZ op yo Dr. Stephen Ng and Barbara Li wrote this case under the supervision of Professors Xiande Zhao‚ Xuejun Xu and Yang Lei solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation
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Advanced Corporate Finance‚ March 2004 1. Weighted average cost of capital for Marriott Corp. The WACC is calculated using the formula: This uses the underlying assumption that the debt-equity ratio for the firm remains constant. In Marriott’s case the corporation’s target leverage ratio based on interest coverage target is set at 60% as taken from Table A. The WACC for the whole firm represents the average cost of capital of the firm’s underlying operating structure. To use this WACC it must
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