different rates on different borrowings as company does not borrow all borrowings at one rate. So‚ cost of debt can be calculated as: Cost of debt = Total Interest Payment/Total long term debt The cost of equity can be calculated using CAPM formula. According to CAPM
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rf | g | βfor CC | βfor NC | rm-rf | CAPM for CC | CAPM for NC | Share outstanding | tax | 0.0680 | 0.0300 | 1.3300 | 1.2300 | 0.0750 | 16.78% | 16.03% | 90‚500‚000 | 0.35 | Total gain in Operating imcome (in million) | 1997 | 1998 | 1999 | 2000 | 2001 | Terminal value | CSX | 0 | 240 | 521 | 730 | 752 | 5620.90 | Norfolk Southern | 0 | 231 | 429 | 660 | 680 | 5375.29 | NPV(in million) | 1997 | 1998 | 1999 | 2000 | 2001 | Terminal | Total | CSX | 0 | 114.3997 | 212.6677 | 255.1742
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pricing model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and
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properties. Method of calculating cost of capital: Most prominent method of calculating cost of capital is CAPM (capital asset pricing model). One important point here is that as company was utilizing both debt and equity as its source of funds then we calculate WACC (weighted average cost of capital) instead of simple cost of capital. Calculating weighted average cost of capital: In CAPM model we need estimates for following items: 1. Risk free rate: Generally a return on long term government
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equity for the upcoming year can be inferred by using the Beta of equity in the CAPM formula. In the case we are given the Beta of equity for the corporation. Therefore to calculate the cost of equity we plug the Beta of equity into the CAPM formula. Through this calculation we conclude that the cost of equity is 11.23%. These are the results we obtain: Company’s Beta of Equity = 1.25 | Find Cost of Equity (Ke) by CAPM | Ke @ EMRP of 5% = .0498+1.25(.05) | 0.11230 | The next step Midland
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Case Study analysis TATA-CORUS:- Q.1. What are the benefits of the TATA-CORUS merger deal to the stakeholders of TATA Steel and the stakeholders of CORUS? Evaluate the post-merger security with the help of CAPM Model. A.1. On January 31st‚ 2007 India’s Tata Steel acquired Corus‚ the erstwhile British Steel Major at a price of 608 pence per Corus share totaling $12.1 billion/ Rs 54‚000 crore/ £6.1 bn‚ which was five pence per share higher than the offer of Brazil’s CSN (Companhia Siderugica Nacional)
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also gave their opinions on whether the stock was a sound investment. WACC CALCULATION: Cost of Capital Calculations: Nike Inc Cohen calculated a weighted average cost of capital (WACC) of 8.3 percent by using the capital asset pricing model (CAPM) for Nike Inc. I do not agree with her figure‚ and the reasons to that are as follows: Value of equity The problem with Cohen’s calculations is that she used the book value for both debt and equity. While the book value of debt is accepted as
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points) Suppose CAPM works‚ and you know that the expected returns on Walmart and Amazon are estimated to be 12% and 10%‚ respectively. You have just calculated extremely reliable estimates of the betas of Walmart and Amazon to be 1.30 and 0.90‚ respectively. Given this data‚ what is a reasonable estimate of the risk-free rate (the return on a long-term government bond)? (No more than two decimals in the percentage return‚ but do not enter the % sign.) First start by writing out the CAPM formula: Stock
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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? WACC is the weighted average cost of capital. It can be calculated as: WACC = (Weight of funding source 1) x (Cost of funding source 1) + … + (Weight of funding source n) x (Cost of funding source n) Usually this will be simply: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity) It is important to estimate
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Introduction CAPM has been an active area of research over the past half century since the introduction of Sharpe development of the capital asset pricing model. Much progress has been made in the early years on the linear relationship between expected return and beta(Black‚ Jensen and Scholes 1972 and Fama and MacBeth 1973). Later studies however show weak empirical evidence on these relationships. Since then‚ although extended versions of CAMP have been introduced such as CAPM with higher-order
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