The Cost of Capital LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain what is meant by a firm’s weighted average cost of capital. • Define and calculate the component costs of debt and preferred stock. • Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. • Briefly explain why the cost of new equity is higher than the cost of retained earnings‚ calculate the cost of new
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assistant‚ Joanna Cohen‚ to estimate Nike’s cost of capital‚ which‚ per Cohen’s analysis‚ came to 8.4%. Background The cost of capital is the minimum return that a company should make on an investment or the minimum return necessary for investors to cover their cost. Two main factors of the cost of capital are the cost of debt and the cost of equity. The capital used for funding a business should earn returns for the investors who risk their capital. For an investment to be worthwhile
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Nike‚ Inc.: Cost of Capital Case 15 Financial Administration FINC 5713-180 Team 1 Fall 2013. October 8‚ 2013. Introduction Kimi Ford a portfolio manager at NorthPoint Group which is a mutual-fund management firm‚ is considering to buy some shares from Nike‚ inc even if it’s share price had declined from the beginning of the year‚ for the Northpoint Large-cap fund she managed which invested mostly in Fortune 500 companies and it was doing well despite the decline
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paper will look at the three most common models used for estimating the rate of return for a given company; dividend growth‚ Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). The board of directors for Apple Computer Corporation will receive this report‚ and based on the findings and analysis included‚ Apple will be given a recommendation as to the cost equity model they should implement to estimate their future rate of returns. This report will discuss the accuracy and ease
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these questions) Day 1 1. Identify the cost of capital and estimate the cost of placing an order. Assume that the annual inventory cost of a unit is given by‚ CH = iCI‚ where i is the cost of capital and CI‚ the unit cost of the item. 2. Consider the connector data and the all unit price structure described in Table 1. For each price level ($5.00‚ $4.75‚ etc.) determine the EOQ‚ and the corresponding total annual cost. Sketch the total annual cost as a function of the order quantity. Based on
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does Marriott use its estimate of its cost of capital? Does this make sense? Marriott has defined a clear financial strategy containing four elements. To determine the cost of capital‚ which also acted as hurdle rate for investment decision‚ cost of capital estimates were generated from each of the three business divisions; lodging‚ contract services and restaurants. Each division estimates its cost of capital based on: Debt Capacity Cost of Debt Cost of Equity All of the above are calculated
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Average Cost of Capital What It Measures The weighted average cost of capital (WACC) is the rate of return that the providers of a company’s capital require‚ weighted according to the proportion each element bears to the total pool of capital. Why It Is Important WACC is one of the most important figures in assessing a company’s financial health‚ both for internal use (in capital budgeting) and external use (valuing companies on investment markets). It gives companies an insight into the cost of their
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WEIGHTED AVERAGE COST OF CAPITAL 1. Calculate the current cost of capital of Secure and Safe on a weighted average basis Capital structure Type Details $50‚000‚000 bonds 5.5% coupon $20‚000‚000 preferred stock Par value $50 per share Dividend $2.75 per share p.a $25‚000‚000 book value of common stock Cost of capital is 12% Firm’s marginal tax rate is 30%. Cost of debt (issuance of bonds) According to the book Finance for Managers (2015)‚ we get the real cost of debt by taking out the tax liability
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Harvard Business School 9-298-101 Rev. March 18‚ 1998 Marriott Corporation: The Cost of Capital In April 1988‚ Dan Cohrs‚ vice president of project finance at the Marriott Corporation‚ was preparing his annual recommendations for the hurdle rates at each of the firm ’s three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987‚ Marriott ’s sales grew by 24% and its return on equity stood
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Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand‚ expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time‚ Marriott had three main lines of business‚ lodging‚ contract services and restaurants‚ with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning‚
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