Identify some of the factors that affect the overall‚ composite cost of capital. • 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 and briefly explain the three separate and distinct types of risk that can be identified‚ and explain the procedure many firms use when developing subjective risk-adjusted costs of capital.
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would affect the other lines of the business‚ as well as the particular division itself. The company is also adept at issuing debt by way of notes to increase capital and cash flow. However‚ Netflix‚ Inc. should be careful about maintaining an optimal debt/equity mix. The company’s past and current capital investment projects have been successful at generating sizable returns. NFLX has a 10-year average of 19.61% return on invested capital (Morningstar‚ 2014). Beta As noted by Ross‚ Westerfield
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Capital Structure and the Cost of Capital: TheoryChapter 13 :Financial Theory and Corporate Policy (Copeland and Weston) INTRODUCTION In the summary of the following chapter is shown the mixture of the financial source of a company. There are the sources of debt and equity but also the financing affects of the cost of capital. Furthermore‚ it shows its connections to the shareholder’s wealth and how to calculate the cost of capital in a specific situation where the risk is depending from the case
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10 4.4 Bankruptcy Risk Assessment 11 4.5 Leverage Policy Summary 12 4.6 Is this the Optimal Leverage Policy? 13 5 Dividend Policy 14 5.1 Current and Recent History of Dividend Payment 14 5.2 Dividend policy comparing to comparable firms 14 5.3 Relevant Company Characteristics to its Dividend Policy 16 5.4 Analysis of Company’s Dividend Policy and Lintner’s Analysis 16 5.5 Optimal Dividend Policy 17 6 Valuation 19 6.1 Assumptions 19 6.2 Valuation Method 20 6.2.1
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10 4.4 Bankruptcy Risk Assessment 11 4.5 Leverage Policy Summary 12 4.6 Is this the Optimal Leverage Policy? 13 5 Dividend Policy 14 5.1 Current and Recent History of Dividend Payment 14 5.2 Dividend policy comparing to comparable firms 14 5.3 Relevant Company Characteristics to its Dividend Policy 16 5.4 Analysis of Company’s Dividend Policy and Lintner’s Analysis 16 5.5 Optimal Dividend Policy 17 6 Valuation 19 6.1 Assumptions 19 6.2 Valuation Method 20 6.2.1
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Implication of EMH EMH and Technical Analysis Technical analysis bases decisions on past results. EMH‚ however‚ believes past results cannot be used to outperform the market. As a result‚ EMH negates the use of technical analysis as a means to generate investment returns. With respect to fundamental analysis‚ the EMH also states that all publicly available information is reflected in security prices and as such‚ abnormal returns cannot be achievable through the use of this information. This
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------------------------------------------------- Chapter 15 Capital Structure Decisions ------------------------------------------------- ANSWERS TO END-OF-CHAPTER QUESTIONS 15-1 a. Capital structure is the manner in which a firm’s assets are financed; that is‚ the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm--debt‚ preferred stock‚ and common equity. Business risk is the risk
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2.6. Optimal capital structure 13 3.Dividend 14 3.1. Dividend policy .14 3.2. Competitors Dividend Analysis …16 3.2.1 Brickworks Limited…...................................................................................................16 3.2.2. Boral Limited………………………………………………………….……………..….…....17 3.2.3. Fletcher Building Limited…………………………………………..……………….……....17 3.3. Comparison ………………………….…………………………………….......………………….18 3.4. Optimal dividend
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A company with low gearing is one that is mainly being funded or financed by share capital (equity) and reserves‚ whilst the one with a high gearing is mainly funded by loan capital. Now the question to address is which of the two (equity and debt) is cheaper to the company? The answer is that cost of debt is cheaper than cost of equity. This is because debt is less risky than equity and the tax advantage of debt over equity as discussed below: Risk: debt is less risky than equity because: • the
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Modigliani-Miller theorems on capital structuring‚ emphasising especially on the relationship between equity and debt. This is carried out numerically via a simplified financial statement‚ which takes us through the methodology that leads to the ROE‚ WACC and firm’s value‚ all plotted against leverage. Introduction The Modigliani and Miller (M&M) theorems on capital structuring have‚ inarguably‚ laid down the foundations for modern corporate finance. There are several principles that underlie these
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