Chapter 9 Cost of Capital 1. What is the WACC? a. Weighted Average Cost of Capital- most firms employ different types of capital‚ and because of their differences in risk‚ the difference securities have different required rates of return. Typically=debt‚ preferred stock and common equity. 2. What precautions must we take when measuring the WACC to use for capital budgeting decisions (future investment)? b. The company’s current and recent past book and market value structures
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To sustain further improvements to a company’s bottom line and profitability‚ Guillermo’s Furniture is completing a pro-forma cash flow analysis that includes net present value (NPV)‚ internal rate return (IRR)‚ and weighted average cost control (WACC) analysis’. The plan is to incorporate a merger of a high tech furniture business‚ a broker distributer business‚ or the status quo manufacturing. The issues driving these analysis decisions are the facts that a company located in Sonora Mexico relying
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Week One Discussion Questions • What is the capital market? How is the primary market different from the secondary market? In your opinion‚ are these markets efficient? Why? • What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after Sarbanes-Oxley was passed? Provide examples to support your answer. • What ratios measure
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The Cost of Capital 1 Background As investors desire to obtain the best/highest return on their investments in securities such as shares (Equity) and loans to companies such as debentures (Debt)‚ these returns are costs to the companies paying these Dividends (on equity) and Interest (on Debts)! It all depends on the perspective from which we chose to view the calculation (are we Earning or Paying?) Companies MUST consider the cost of financing they receive in the form of equity or debt if they
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Of course‚ every company must determine its preference on its debt-to-equity ratio and determine which capital structure works best for them. Some approaches to analyzing capital structure are: 1. EBIT – EPS: This analyzes the impact of debt on earnings per share (EPS). Optimizing shareholder’s wealth is the optimum goal and therefore‚ this approach analyzes the high EPS based on an expected range of earnings before income taxes (EBIT). 2. Valuation: Determines impact of debt use on shareholder’s
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goals of Midland’s financial strategy are to fund overseas growth‚ invest in value-creating project‚ achieve an optimal capital strategy and repurchase undervalued shares. To accomplish all these goals the company has asked Janet Mortensen‚ Vice President of finance for Midland energy resources‚ to calculate the weighted average cost of capital (WACC) for the company as a whole. Formula: WACC = rd (D/V) (1-t) + re (E/V) Where‚ rd = cost of debt; re= cost of equity; D = Market value of debt; E= Market
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2. Describe briefly Intel’s current capital structure. Discuss whether in your view this capital structure is optimal for Intel‚ with particular emphasis on the pros and cons of Intel’s substantial cash holdings. Articulate and defend a “target” capital structure for Intel. Cee Capital Structure As shown in the financial income statement (Exhibit3)‚ Intel Corp. (INTC) has a capital structure consisting most of equity. Intel has very little debt in its capital structure and the cost of debt
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of debt and equity. It will help determine the true value of the company while also determining what their free cash flow is and the risk level for the organization. The question that this research will try to answer is if the 125 year old company is financially ready for another 125 years. The company needs to remain liquid and keep its operating costs low during times of inflation. The methodology that will be used will be multiple financial ratios to determine how the organization is operating
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Valuation- “projected financial performance into values.” Involves projecting/ making budgets. Value of an Asset = Value of Cash Flow (CF) it Will Generate (not profits) CF=1/(1+r)^1 value is based on three things- Current Cash Flow‚ Expected growth (used with to estimate future cash flow)‚ Riskiness of expected future cash flow (discount rate).Net Present Value- Value CFs using project discount rate based on risk Investment Decision-which real assets the firm should acquire.Choose positive and
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will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre. a. Why is corporate finance important to all managers? It is important to managers because it determines what limitations managers have to expand operations‚ make improvements to the corporation and its ability to raise capital. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the
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