(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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Damodaran’s Country Risk Premium Contents |1 |Introduction |2 | | | | | |2 |CRP concept |2 | | |
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prepared to defend your specific assumptions about the various inputs adopted into equations. For example‚ the team is expected to suggest the proposed market risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business‚ contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost
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interest rate into account‚ PPC’s actual cost of capital would be calculated as: [.08(1-.34)]= 5.28%. PPC has simply been using 10% (their equity growth rate) as their cost‚ but must instead either use the CAPM model to calculate their cost of equity‚ or the Dividend-growth model. If they use the CAPM model‚ which is the most accurate‚ their cost of equity will be: .078+.8(.1625-.078)=14.56%. Or they can use the Dividend-growth model and their cost of equity would be: (2.7/63)+.1=14.29%. Both are
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Risk and Return -II PGDM/MMS- SEM-II PROF. V. RAMACHANDRAN FACULTY- SIESCOMS ‚ NERUL 1 PORTFOLIOS & RISK What is an Investment Portfolio A group of Assets that is owned by an Investor Single Security is riskier than Investing in a Portfolio. Portfolio may contain- Equity Capital‚ Bonds ‚ Real Estate‚ Savings Accounts‚ Bullion‚ Collectibles etc. In other words the Investor does not put all his eggs in to one Basket. 2 Diversification –Risk Reduction Let us assume you put your money
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Appendix I C1: Equity = Stock Price x Number of Shares Outstanding = $42.09 X 271.5 = $11‚427.435 million C2: Using Adjusted Beta formula: Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79 C3: Using CAPM formula: KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89% C4: Using rearranged DGM formula: KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7% C5: Using redeemable bond formula: KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n KD=4.52% C6: Using WACC formula: Rwacc =4.52*10.19% + 8
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) – a firm’s investment in short term assets – cash‚ marketable securities‚ inventory and accounts receivable. Capital Asset Pricing Model (CAPM) A model based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return plus a risk premium reflecting only the risk remaining after diversification. The CAPM equation is Application difficulties – difficult to measure/ estimate Risk free rate Beta - A measure of a stock’s market risk‚ or the extent
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TUI CAPM &Sources for Capital Module 3/ Case 09/25/2012 FIN301 Dr. Jensen CAMP & Sources for Capital This is a two part report based on the Principles of Finance regarding CAMP and Sources for Capital. Included in this report will be the following information: Part 1: There will be scenarios that will be explained in regards to diversifiable or un-diversifiable. Part 2: American Superconductor Part 1 “For each of the scenarios below‚ explain whether or not it represents
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