HBR.ORG Do You Know Your Cost of Capital? Probably not‚ if your company is like most by Michael T. Jacobs and Anil Shivdasani July–AuGust 2012 reprinT r1207L For arTicLe reprinTs caLL 800-988-0886 or 617-783-7500‚ or visiT hbr.org Do You Know Your Cost Of Capital? probably not‚ if your company is like most by Michael T. Jacobs and Anil Shivdasani W With trillions of dollars in cash sitting on their balance sheets‚ corporations have never had so much money. How executives
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THE JOURNAL OF FINANCE • VOL. LIII‚ NO. 4 • AUGUST 1998 Agency Costs‚ Risk Management‚ and Capital Structure HAYNE E. LELAND* ABSTRACT The joint determination of capital structure and investment risk is examined. Optimal capital structure ref lects both the tax advantages of debt less default costs ~Modigliani and Miller ~1958‚ 1963!!‚ and the agency costs resulting from asset substitution ~Jensen and Meckling ~1976!!. Agency costs restrict leverage and debt maturity and increase yield
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Investors Valuation of Stock An investor should value a stock by looking at the intrinsic value of the stock and how the market value compare to the intrinsic value. The most common mathematical method of valuing stock is to determine the price earnings ratio (P/E). The P/E ratio is calculated by dividing the share price by the company’s net income. As a general rule a P/E ratio should be in the higher teens. Stocks with a below-market P/E are considered cheaper‚ and a higher P/E ratio are considered
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50% 12.36% X: rt = (Ct + P rt = ($1‚50 rt = 0.125 = b) Both investments are equally risky. Keel should recommend Investment X because it has a Pt - Pt-1) / (Pt-1) Y: rt = (Ct + Pt - Pt-1) / (Pt-1) 0 + $21‚000 - $20‚000) / ($20‚000) rt = ($6‚800 + $55‚000 - $55‚000) / ($55‚00 = 12.5% rt = 0.124 = 12.4% a higher rate of return for the same level of risk. 00) P8-4 Initial Investment Annual Rate of Return Pessimistic Most Likely Optimistic a) Range
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(3-1) Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20‚000. What is the level of its accounts receivable? Assume there are 365 days in a year. AR = $400‚000 (3-2) Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debtratio? D/A = 60% (3-3) Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows
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Using the publicly available data‚ we estimated the weighted average cost of capital of the AMD and Duke Energy. For the AMD‚ the WACC is 10.83%. For Duck Energy‚ the WACC is 2.76% When we calculate those number‚ we need to know the equity and debt of the company which can easily find on yahoo finance. The cost of debt and the corporate tax rate that we calculated are also based on the data from yahoo finance. We made Beta for the companies with 10 year ranges and use it to calculate return of
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Midland Energy Resources‚ Cost of Capital The case is about how Janet Mortensen‚ senior vice president of project finance for Midland Energy Resources‚ prepare her annual cost of capital estimates for midland and each of its three divisions for her company. Midland was a global energy company with operations in oil and gas exploration and production (E&P)‚ refining and marketing(R&M)‚ and petrochemicals. Estimates of cost of capital prepared by Mortensen were used in many analyses within
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Ameritrade’s Cost of Capital Harvard Case Study 1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? One factor that is significant and pertinent to this case is determining the cost of capital that should be employed for Ameritrade. An appropriate discount rate is required to derive the net present value of the advertising program and technology upgrades. With that said‚ estimating future cash flows
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Capital Investment Analysis/Capital Budgeting: Learning Objectives: After studying this topic you should be able to: | | Define and explain capital investment analysis. | | | Evaluate capital investment proposals using average rate of return method‚ cash payback method‚ net present value method‚ and internal rate of return method. | | | Explain the advantages and disadvantages of various methods of evaluating capital investment proposals. | | | Explain the concept of the time
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Inc. Completed as a Group with the Following Individuals: (in alphabetical order by last name) Adetunji Adeniyi Tung F. Cheng Gregory Chiu Rashmin Patel WenHao Zhang Course Title: Accounting and Finance Course No./Section: MG6093 Instructor: Frank X. Apicella November 28‚ 2012 Yeats Valves Question The following are questions which should focus the groups on important aspects of the Yeats Valves case. Note the actual
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