TO: VEFA TARHAN‚ SPECIAL TOPICS IN FINANCE FROM: MAHMUT MACIT‚ AHMET ARDA ATIK‚ CAN KORKMAZ DATE: NOVEMBER 4‚ 2014 CASE: PIONEER PETROLEUM CORPORATION Overview of the Company Pioneer Petroleum Corporation established in 1924 and operating in oil refining‚ pipeline transportation‚ and industrial chemical fields. Company uses weighted-average cost of capital (WACC) as a discount rate to discount future cash flows that generate from possible projects. According to net present values of these possible
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Case Study on Nike Inc. What is the WACC and why is it important to estimate a firm’s cost of capital? The WACC is a firm’s overall cost of capital‚ taking into account the weighted average of its equity and debt costs of capital. A firm’s WACC is the minimum return (hurdle rate) required by its capital providers to stay invested. Therefore managers of a firm should only invest in projects that generate returns exceeding the firm’s cost of capital. For the company’s owners the WACC is the minimum
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term debt‚ because short term debt is considered as part of working capital. - Error in value of equity JC used the book value of $3‚494.50. We should use market value (current stock)‚ which is more accurate. - Error in CAPM Calculations JC considered 20-year US Treasury bonds as risk free‚ which is not consistent with the company’s cash flow duration
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associates worldwide. In 2005 for this case the sales were approximately $285 billion and operated 4‚000 stores worldwide. Valuations Dividend Discount Method (DDM): The DDM is a procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at‚ then the stock is undervalued. This model is appropriate to Wal-Mart as it has been paying a dividend
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Kd(1-t) x D/(D+E) 7.17(1-.38) x 1‚296.6/(12‚724.035) 4.44% x 10.2% = .4529% We agreed with Ms. Cohen’s results of the CAPM model and used them to calculate the cost of equity. The geometric mean for MRP equaled 5.9%‚ the average beta for Nike since 1996 was .8‚ and the 10 year treasury bond for the risk free rate was 5.39%. Using CAPM‚ the cost of equity would be as follows: Ke = Rf + Beta(MRP) Ke
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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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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? 1.1 The definition of WACC Weighted average cost of capital(WACC)‚ is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could
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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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will examine why WACC is important in decision-making and I will show how WACC for Nike Inc. is calculated correctly. Also‚ I will calculate the company’s cost of equity using three different models: the Capital Asset Pricing Model (CAPM)‚ the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price)‚ I can analyze their advantages and disadvantages and finally conclude whether or not an investment in Nike is recommended. My analysis suggests that Nike Inc.’s common stock should
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discount model (DDM)‚ the value of Wal-Mart’s stock price is $60.20. The most recent closing price of Wal-Mart stock was $53.48. Given this information‚ the constant growth DDM valuation suggests that the Wal-Mart stock is currently undervalued. * Utilizing the two-stage DDM approach‚ the value of Wal-Mart’s stock price is $83.95. Similar to the constant growth DDM valuation conclusion‚ the Wal-Mart stock is currently undervalued. * The capital asset pricing model (CAPM) was used to determine
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