The Cost of Capital Benedict Amanor‚ Yolanda Brown-McCutchen‚ Edith Compean‚ Angel Longino and Melissa Shea-Brooks FIN/571 May 18‚ 2015 William Stokes The Cost of Capital In our fifth week of understanding the practices of Corporate Finance‚ we reviewed the Cost of Capital video. This video provided information on Pfizer‚ a researched based pharmaceutical company that makes products to help face health care challenges. Our goal is to highlight the cost of capital as described by Amit
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Question 6 What is the cost of capital for the lodging and restaurant divisions of Marriott? Answer: The cost of capital for lodging is 9.2% and the cost of capital for restaurants is 13.1% Calculation: WACC = (1-t) * rd * (D/V) + re* (E/V) Where: D= market value of DEBT re = aftertax cost of equity E = market value of EQUITY V = D+E rd = pretax cost of debt t = tax rate To calculate the formula above‚ we need to determine each component Tax rate (t) 56% --> calculated before LODGING
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conducting an analysis of Marriott Corporation for calculating the hurdle rates at each of the firm ’s three divisions--lodging division‚ restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate‚ and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all‚ we will determine the cost of debt‚
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1. Marriott uses its’ cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets‚ investing in projects that increase shareholder value‚ optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with returns below their respective WACC which will result
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Nike Inc.: Cost of Capital The Weighted Average Cost of Capital (WACC) is the overall required rate of return on a firm as a whole. It is important to calculate a firm’s cost of capital in order to determine the feasibility of a particular investment for a firm. I do not agree with Joanna Cohen’s WACC calculation. She calculated value of equity‚ value of debt‚ cost of equity‚ and cost of debt all incorrectly. For value of equity‚ Joanna simply used the number stated on the balance sheet instead
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to determine the weighted average cost of capital (WACC). This SLP calculates the WACC for my SLP company – McDonalds‚ discusses how those calculations were arrived at and briefly describes WACC and what investors use it for. COMPANY NAME: McDonalds Inc Balance sheet date: 31 DEC 07 Market values date: 1 SEP 08 SOURCE BOOK VALUE MARKET VALUE PROPORTIONS COST (%) PRODUCT (a) (b) (c) (d) (e)
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Case #3 “Marriott Corporation” The Cost of Capital” What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions? – What risk-free rate and risk premium did you use to calculate the cost of equity? – How did you measure the cost of debt? – How did you measure the beta for each division? Solution What risk-free rate and risk premium did you use to calculate the cost of equity? – Risk-free rate proxy The risk-free
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School of Management Blekinge Institute of Technology THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION. By Alaba Femi‚ AWOMEWE & Oludele Olawale‚ OGUNDELE Supervisor: Anders Hederstierna Thesis for the Master’s degree in Business Administration Fall/Spring 2008 THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION. By Alaba Femi‚ AWOMEWE & Oludele Olawale‚ OGUNDELE A thesis submitted in partial fulfillment of the requirements for the degree
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WACC: Weighted average cost of capital =WACC= SS+B×Rs+BS+B×RB×1-tC note: Rs ‚ cost of equity; RB ‚ cost of debt; tC ‚ corporate tax rate. For cost of equity‚ Rs‚ we calculate it by using the SML‚ according to CAPM model. Rs=RF+β×[RM-RF] As we can see in the chart behind the case‚ beta of Worldwide Paper Company is 1.10; the Market risk premium (RM-RF) is 6.0%. Because this on-site longwood woodyard project has six year life and the investment spend over two years‚ the total long of this program
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FINANCIAL MANAGEMENT: CAPITAL BUDGETING MINI CASE 1 CAPITAL BUDGETING (MINI CASE) QUESTION A What is capital budgeting? Solution: Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore‚ a financial manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this‚ a sound procedure to evaluate
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