References: 1. Fisher‚ I.‚ The Theory of Interest‚ MacMillan (London)‚ 1930. 2. Hill‚ R.A.‚ “Capital Budgeting: The Cut-Off Rate for Investment”‚ The Singapore Accountant‚ November 1988. 3. Gordon‚ M.J.‚ “Optimal Investment and Financing Policy”‚ The Journal of Finance‚ Vol. 18‚ No.2‚ May 1963. 4. Keynes‚ J. M.‚ The General Theory of Employment‚ Interest and Money‚ MacMillan (London)‚ 1936. 5. Modigliani‚ F. and Miller‚ M.H.‚ “The Cost of Capital‚ Corporation
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WACC = We Ke + WpKp +Wr Kr + WdKd + WtKt WACC = 0.67*.18+0.33*13(1-.40) =0.146 or 14.6% A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All capital sources – common stock‚ preferred stock‚ bonds and any other long-term debt – are included in a WACC calculation. All else equal‚ the WACC of a firm increases as the beta
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Bendigo Bank Case Study 2011 Question (1): Capital Structure and Financing in the Banking Industry Introduction Australian banks are an interesting case of capital structure and financing considerations as far as companies go‚ in that they are regulated in a number of ways by the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA). Considerations of capital structure have the effect of reducing the cost of capital and so in turn increase the value
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and capitalization ratios as measures of credit quality. • Explore the practical challenges involved in determining the optimal mix of debt and equity‚ in particular assessing the trade-off between the benefits of debt tax shields and the costs of financial distress. The case affords the opportunity to highlight methodological problems in estimating the optimal mix. • Consider the concepts of debt capacity and financial flexibility. The notion advanced in this case is that flexibility
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JetBlue IPO WACC The estimation of cost of capital for JetBlue proved to be a difficult process. Considering the company has an unfavorable capital structure‚ due to the fact that they are acquiring a large number of aircrafts‚ simply taking the weights of debt and equity are not acceptable. In order to accurately judge the discount rate the multiples method is necessary. The comparison was to a leading low-fare airline company‚ Southwest. Another critical point is that taking the book
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established in 1924 and operating in oil refining‚ pipeline transportation‚ and industrial chemical fields. Company uses weighted-average cost of capital (WACC) as a discount rate to discount future cash flows that generate from possible projects. According to net present values of these possible projects management decides to invest or not. WACC represents the minimum rate of return from the investments to satisfy both debt-holders (bondholders) and shareholders. Since these investments are forward-looking
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leadership‚ we will explain capital structure and determine weighted average cost of capital (WACC) from the assumption provided by Mary Francis. Furthermore‚ we will show how WACC and Capital Structure can be leveraged to find out the viability of the capital project. Additionally‚ we will explain marginal cost of capital. To close‚ we will make a recommendation on the best approach to apply to project evaluation between capital structure and WACC Capital Structure Capital Structure refers
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Question 1 Which of the following statements is correct? Answer One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. If a company has an established clientele of investors who prefer a high dividend payout‚ and if management wants to keep stockholders happy‚ it should not follow the strict residual dividend policy. If a firm follows a strict residual dividend policy‚ then‚ holding all else constant‚ its dividend payout ratio
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2007 minus10 year TRSY bond. Using these assumptions with increase in Debt‚ cost of equity increases for all the different capital structures. Interesting observation with cost of capital is that having debt in your capital structure decreases your WACC because of the benefit of tax shield. b. As equity value decreases with increase in debt value‚ ROE decreases with debt increasing in the capital structure. 3. Based on the analysis in Exhibit 9 (or additional analysis beyond the case exhibit)
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staying with the “investment-grade” rating for bonds. His plan would have to afford Polaroid low costs and continued access to capital under alternative debt policies. Norwood would need to access the right optimal strategy with these restrictions; that is to say that even if the most optimal capital structure was to force Polaroid’s bond rating under BBB-rated‚ Norwood would need to settle for some middle ground. Financing Requirements: Polaroid faces several business risks in March of 1996
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