Theory 9 3.6 Optimal Capital Structure 10 4.0 Dividend Policy 10 4.1 Billabong dividend history 11 4.1.1 Lintner’s Stylised Facts & Clientele Effects 12 4.2 Similar firms Dividend Analysis 13 4.3 Relative Comparison of Billabong Dividend Policy to similar firms 14 4.4 Relationship Between the Company’s Characteristics and Dividend Policy 15 4.5 Alternatives to Dividend Payments 16 4.6 Optimal Dividend Policy 16 5.0 Valuation 18 5.1 Weighted Average Cost of Capital (WACC) 20 5.2 Estimation
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in debt affect it? How do you identify an organization’s optimal cost of capital? a) The main elements in calculating the cost of capital is the opportunity cost of all capital invested in an enterprise. b) An increase in debt affects it because the cost of debt capital is equivalent to the actual or imputed interest rate on the company’s debt‚ adjusted for the tax- deductibility of interest expenses. c) An organization’s optimal cost of capital can be identified by calculating the cost
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Using two hurdle rates adjusts for the risk in each industry allows the company to adequately value each segment. Our analysis will show that by using two hurdle rates it will lower the cost of equity and WACC for the less risky telecommunications segment‚ while raising the cost of equity and WACC for the more risky products and systems segment. Lastly‚ our calculation of the economic profitability for each industry using the segmented hurdle rates will show that Teletech may be overvaluing its products
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given below: Which of the following statements is CORRECT? a. More of Project A’s cash flows occur in the later years. b. More of Project B’s cash flows occur in the later years. c. We must have information on the cost of capital in order to determine which project has the larger early cash flows. d. The NPV profile graph is inconsistent with the statement made in the problem. e. The crossover rate‚ i.e.‚ the rate at which Projects A and B have the same NPV‚ is greater than either project’s
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be issued. Calculate the firm’s composite‚ or weighted average‚ cost of capital. Identify some of the factors that affect the WACC—dividing them into factors the firm cannot control and those they can. Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. List some problems with cost of capital estimates. Lecture Suggestions
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Chapter 16- Old 10th Edition Capital Structure Decisions: The Basics MINI-CASE ASSUME YOU HAVE JUST BEEN HIRED AS BUSINESS MANAGER OF PIZZAPALACE‚ A PIZZA RESTAURANT LOCATED ADJACENT TO CAMPUS. THE COMPANY’S EBIT WAS $500‚000 LAST YEAR‚ AND SINCE THE UNIVERSITY’S ENROLLMENT IS CAPPED‚ EBIT IS EXPECTED TO REMAIN CONSTANT (IN REAL TERMS) OVER TIME. SINCE NO EXPANSION CAPITAL WILL BE REQUIRED‚ PIZZAPALACE PLANS TO PAY OUT ALL EARNINGS AS DIVIDENDS. THE MANAGEMENT GROUP OWNS ABOUT 50 PERCENT OF
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price of the share. The debt-to-equity ratio is a measure of the company’s financial leverage. The ratio varies from industry to industry and is also firm-specific. The graph of D/E ratio versus Weighted Average Cost of Capital is used to determine the optimal D/E ratio for each company. Companies chosen: Larsen & Toubro‚ Ambuja cements and wipro. larsen and toubro oVERVIEW Larsen & Toubro (L&T) is a technology-driven USD 9.8 billion company that infuses
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cost of common equity for the company? [4 marks] b. What is the estimated after-tax cost of debt for the company? [4 marks] c. What is the estimated cost of preferred equity for the company? [4 marks] d. What is the estimated WACC of the company? [4 marks] e. What is the implied long run growth rate of the company’s dividends? [4 marks] Question 2. (20 marks) Your company is considering buying a new factory. The initial cost of the factory is $500‚000‚ but there
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periods‚ and the second being Economic Value Added (EVA). EVA was calculated as: EVA = EBIT(1-t) – WACC(period capital expenditure) Midland Energy Capital Planning Model • Optimize capital structure • Midland primarily optimized its capital structure by taking advantage of the borrowing capacity inherent in its energy reserves and long term assets‚ such as refining facilities. Midland maintained an optimal debt level which was based on energy prices and its own stock prices. This practice allowed them
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borrows at the optimal amount of debt or less. If the company borrows more than the optimal amount of debt‚ then borrowing will destroy value. Borrowing will increase value of the firm through the tax shield that borrowing brings. Thus‚ the increase value of the firm will increase the value of equity and create value to shareholders. {draw:frame} {draw:frame} *If leverage affects value‚ then s*hould* it* cause changes in either the discount rate of the firm (i.e.‚ it’s WACC) or the cash
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