life of the project. project’s debt financing is unknown over the life of the project. Both A and B. Both B and C. 2. award: 1.00 point Calculate the Horizon Value in 2013 for XYZ Manufacturing Company if Free Cash Flows in 2013 are $678‚ WACC= 12.5%‚ and growth rate is 4%. Assume growth is expected to be constant after 2013. $12‚245.67 $3‚231.31 $8‚295.53 $375.28 $19‚231.45 3. award: 1.00 point National Electric Company (NEC) is considering a $40 million project in its power systems
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encouraged you to pursue the idea‚ but to provide support for the suggestion. In today’s market‚ the risk-free rate‚ r RF‚ is 6% and the market risk premium‚ RPM‚ is 6%. CD’s unlevered beta‚ bU‚ is 1.0. CD currently has no debt‚ so its cost of equity (and WACC) is 12%. If the firm were recapitalized‚ debt would be issued and the borrowed funds would be used to repurchase stock. Stockholders‚ in turn‚ would use funds provided by the repurchase to buy equities in other fast-food companies similar to CD. You
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combined firm‚ with synergy. e. How much is the operating synergy worth? Solution: Synergy Gain = $7‚479 - $5‚879 = $1‚600 (Firm Value = FCFF1/(WACC - g) Q.4. In the Grumman-Northrop example‚ described in the previous example‚ the combined firm did not take on additional debt after the acquisition. Assume that‚ as a result of the merger‚ the firm’s optimal debt ratio increases to 20% of total capital from current levels. (At that level of debt‚ the combined firm will have an A rating‚ with an interest
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➢ Alternatively‚ EVA (Economic Value Added) = NOPAT – WACC (Invested Capital) can be applied to value the value of investment project. • Optimal Capital Structure ➢ Midland regularly reevaluated its debt levels and set long-term capital structure accordingly. ➢ Midland’s increasing borrowing capacity will shield additional profits from taxes. ➢ Midland’s target debt ratio is set based on each division’s annual operating cash flow and collateral value of its identifiable assets. ➢ Cost of
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Once the target firm is chosen the bidding firm’s next step is calculating the target firm’s worth. This is done through the process called valuation. The motive for acquisition will guide the bidder on the method used to evaluate the target firm. Some common reasons for acquisitions are that the target firm is undervalued‚ the bidding firm is looking to diversify‚ create economies of scales‚ poorly managed firms‚ or managerial self-interest. If the bidding firm is acquiring the firm due to it being
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case model (filename CASE-10I) has two major sections. The first section constructs partial income statements to illustrate the effect of financial leverage on ROE‚ while the second part conducts the valuation analysis‚ where stock price‚ EPS‚ and WACC are calculated on the basis of capital cost relationships. The INPUT DATA and KEY OUTPUT sections are shown below: INPUT DATA: KEY OUTPUT: Operating Data: Impact on ROE:
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| American Home Products Corporation | Case Study | | Table of Contents Introduction 3 Background 3 Culture of the Business 3 Stages of Development 3 Core problem 4 analysis and options 4 Risk analysis 5 First: The Business Risk 5 Second: The Financial Risk 6 Other kinds of risk: 7 Financial Analysis 7 The WAAC 7 Ratio Analysis 11 Recommendations: 12 References: 12 Introduction Background In 1981‚ AHP had reached sales of more than $4 billion by producing
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Equity 35 Under this new and more debt-oriented arrangement‚ the aftertax cost of debt is 8.8%; the cost of preferred stock is 11%; and the cost of common equity is 15.6%. Recalculate the firm’s weighted average cost of capital. Which plan is optimal in terms of minimizing the weighted average cost of capital? | Prop | Cost | Weight | Composite | Debt | 60% | 8.80% | 0.6 | 5.28 | Preferred Stock | 5% | 11% | 0.05 | 0.55 | Common Equity | 35% | 15.60% | 0.35 | 5.46 | Totals
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first section constructs partial income statements to illustrate ©1993 The Dryden Press All rights reserved. Case 10-1 the effect of financial leverage on ROE‚ while the second part conducts the valuation analysis‚ where stock price‚ EPS‚ and WACC are calculated on the basis of capital cost relationships. The INPUT DATA and KEY OUTPUT sections are shown below: INPUT DATA: KEY OUTPUT: Operating Data: Impact on ROE: Total assets $120‚000‚000 Cost of debt EBIT 13.0% $32‚000‚000 Tax rate
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Fin 3010 Dr. Michello Summer 2007 Practice Problems Expected dividend yield Answer: a EASY i. If D1 = $2.00‚ g (which is constant) = 6%‚ and P0 = $40‚ what is the stock’s expected dividend yield for the coming year? a. 5.0% b. 6.0% c. 7.0% d. 8.0% e. 9.0% Expected return‚ dividend yield‚ and capital gains yield Answer: e EASY ii. If D1 = $2.00‚ g (which is constant) = 6%‚ and P0 = $40‚ what is the stock’s expected capital gains yield for the coming year? a. 5.2% b. 5.4%
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