capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows. The value of a firm’s operations is the present value of its expected future FCF discounted at its WACC. Some
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FACILITATOR: MR NIXON OMORO STUDENT NAME REG NO KASEMBELI WALLACE D61/81594/2012 AGENGA BENTER ARWA D61/81595/2012 Section 1 1. Determine the drivers of capital Structure. The primary factors that influence a company’s capital-structure decision are: Company size Big firms are likely to be more leveraged than small firms. This is due to the huge capital assets that they posses
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after-tax cost of debt; cost of preferred stock; cost of common stock‚ CAPM; cost of common stock‚ constant growth; cost of new common stock; and weighted average cost of capital. PMF Problem- Solver: Cost of Capital This module allows the student to determine the following: 1) cost of long-term debt (bonds)‚ 2) cost of preferred stock‚ 3) cost of common stock‚ 4) weighted average cost of capital‚ and 5) weighted marginal cost of capital. PMF Templates Spreadsheet templates are provided for the following
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essay will explain what discount rate Tesco Plc. should use when deciding on major investment projects. a) Calculate the company’s weighted average cost of capital and explain/justify your calculation. Weighted average cost of capital (WACC) is used to determine whether company should invest in a project. By comparing cost of capital on investment and expected return on capital‚ a company can decide whether investment is worthwhile. Companies use this method as a discount rate for financed projects
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Market premium 0.086 0.086 0.086 Cost of equity 13.88% 15.4% 20.8% WACC 13.88% 13.5% 13.8% EBIT $2‚103 $2‚103 $2‚103 - Taxes - 34% $1‚388 $1‚388 $1‚388 EBIAT $1‚388 $1‚388 $1‚388 + Depreciation $500 $500 $500 - Cap exp. $(500) $(500) $(500) FCF 1‚388 1‚388 1‚388 Value of assets $10‚000 $10‚281 $10‚058 The following are calculations for: 0% debt: Cost of equity = Rf + Bu (Km - Krf) = 0.07 + 0.8(0.086) = 13.88% WACC = WD*Kd+ Ws*rs = 0 + 13.88 = 13.88% NOTE THAT: Km - Krf = Market
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Corporation that weighted average cost of capital (WACC) have to be calculated for every division. To apply the formula of the WACC the costs of equity have to be known. The cost of equity can be determined through the Capital Asset Pricing Model (CAPM). The results for every division’s equity cost and the computation of the hurdle rates can be seen in the Appendix. The divisions with higher risk have higher weighted average cost of capital. WACC/Hurdle Rate Real Estate 9.19% Ceramic Coatings
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will always increase the company’s WACC. b. Since debt financing is cheaper than equity financing‚ raising a company’s debt ratio will always reduce the company’s WACC. c. Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing; however‚ it still may raise the company’s WACC. d. None of the statements above is correct. ANSWER: D 4. Which of the following statements is most correct? a. As a rule‚ the optimal capital structure is found by determining
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Capital Structure -1 Dr. Kulbir Singh Advanced Corporate Finance (ACF) Term III 2013-14 IMT-Nagpur Capital Structure: Introduction Mix of debt and equity use to finance its business Goal of CS Decision: to determine the financial leverage or CS that maximizes the value of company by minimizing WACC. Theory of Corporate Financing MM Theory of CS Irrelevance Trade-Off Theory Agency Theory Dr. Kulbir Singh (IMT-Nagpur) ADF 2013-14 Pecking Order Theory 2 Capital Structure: Introduction…… Theories
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Walgreens: The Corporate Financial Decision Making Analysis Walgreens’ principal activity is to operate a chain of retail drugstores that sells prescription and nonprescription drugs. The company also carries additional product lines like general merchandise including cosmetics‚ food‚ beverages and photofinishing. Walgreens is one of the fastest growing retailers in the United States and led the chain drugstore industry in retail sales and profits last year. The capital structure of this
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Report on Case analysis of California Pizza Kitchen Course (506): Cases in Financial Decision Making SUBMITTED TO: Dr. M. Sadiqul Islam Professor Department of Finance University of Dhaka SUBMITTED BY: Group 21 MBA 16th Batch Department of Finance University of Dhaka Date of Submission April 08‚ 2015 Group No: 21 Serial Name BBA ID MBA ID 1 Farhana Bondhon 16-004 16-615 2 Farha Farzana 16-006 16- 727 3 Marufa Akhter 16-132 16- 657 Letter of Transmittal April 08‚ 2015 Dr. M. Sadiqul
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