up the total of all the debt on the balance sheet. The market value of equity is the "Market Cap‚" and equals the number of (common) shares outstanding multiplied by the price/share. The variable ks represents the cost of common equity. The CAPM can be used for this variable. The weights (wd and was - note that: wd + was = 1; so you only have to calculate one of them). We need to calculate the weight of debt and the weight of equity. In other words‚ what portion of the company’s financing
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NIKE‚ INC.: COST OF CAPITAL Professor Meiberger By Sebastian Gomez Team 5 Cohort: Front The portfolio manager for NorthPoint Group‚ Kimi Ford was deciding if she should pitch in and draw Nike within NorthPoint Large-Cap Fund. Nike‚ which did not have the strongest fiscal year results in 2001‚ was implementing new strategies to heighten its revenue and income. Kimi Ford‚ after having carefully read reports by analyst‚ and their input within this publicly traded company decided to emphasize
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the most recent beta estimate should be used because it is more relevant to the current cost of equity. Furthermore‚ the market values‚ not the book values‚ of debt and equity‚ should be used to correctly weight the capital components. 2) Using CAPM: a. The market free rate is 5.74%‚ which is the longest US Treasury Yield forecast. We used this rate because WACC is used for long-term projects and therefore‚ the longest treasury rate should also be used. b. The market risk premium is the geometric
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Question: 1.Suppose the rate of return on short-term government securities (perceived to be risk-free) is 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the CAPM: a) What is the expected rate of return on the market portfolio? b) What would be the expected rate of return on a stock with β = 0? c) Suppose you consider buying a stock which does not pay a dividend. The current price is $50‚ and in one year
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The purpose of this QCS is to help you review the material on tests of the CAPM and other multifactor models and to illustrate the frequently used two-pass regression approach to testing asset pricing models such as the CAPM and other multi-factor models. As you have seen in the lectures the procedure involves running two regressions. In the first step a time-series regression to calculate factor loadings or betas and in the second step a cross-sectional regression of returns on loadings. This QCS
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(cost of preferred stock) + (% of common equity) * (cost of common equity) = wdrd(1-T) + wpsrps + wsrs Although the equation for WACC is comprised of three components‚ this case study primarily focuses on the Capital Asset Pricing Model (CAPM) for estimating the cost of equity. The reasoning behind
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1. Cohen calculated Nike’s weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement: a) Weighting of Capital Structure: Use of book values of capital rather than the market values b) Cost of Debt Calculation: Incorrect method for calculating debt c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firm’s marginal tax rate 2. Revised Calculation of WACC: WACC
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Capital re = cost of equity rd = cost of debt E = market value of equity D = Market value of debt t = tax rate 2. Calculate cost of equity using the Capital Asset Pricing Model (CAPM). Given are the values: Rf = 5.74% β = 0.8 Rm – rf = 5.9% Required to calculate the cost of equity re; using CAPM. It follows that from our formula Re = rf + β (Rm –rf) = 5.74% + 0.8 (5.9%) = 10.46% Assumptions: We decided to use the 20 year treasury risk free rate value of 5.74% because it is
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All narrative stories include elements and ingredients along with goldilocks conditions that support thresholds of increasing complexity to create new complexities. The modern scientific origin story helps explain the thresholds of increasing complexity as it paints a picture of what was most likely to have happened at the time when the universe was being formed and the steps that were taken in order for life to exist as we know it. For example‚ the ingredients used were the rapid expansion and the
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Land Rover Defender – an Icon Returns. If you ever ask what is the definite off roader to 100 people across the globe‚ at least 80 of them will pick the LandRover Defender. Such is the charm of the rustic‚ bare bones but ultra-capable offering from LandRover. But the production of this legend is nearing its end – the company is ceasing the production by December 2015 – January 2016 period. According to the latest news by Autonews (http://www.autonews.com/article/20151206/OEM04/312079985/storied-defender-due-for-new-era-rewrite)
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