which generates 67% of the company’s net income (Exhibit 3). With regard to division of assets‚ E&P is 53%‚ R&M is 36%‚ and petrochemical is 11%. Midland’s financial strategies are to fund overseas growth‚ invest in value-creating initiatives‚ obtain optimal capital structure‚ and repurchase undervalue shares. In order to accomplish these objectives‚ Midland must calculate and use an accurate cost of capital that will provide reasonable valuation of their strategies. For example‚ funding overseas growth
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Guillermo Furniture Store University of Phoenix FIN 571/December 10‚ 2012 Marcel Santiz In week one‚ the author conducted an analysis on the Guillermo Furniture Store location‚ company finance‚ and the production of work. For this current week‚ the author will analysis some alternative for Guillermo Furniture Store working capital policy by implementing multiple valuation techniques with an emphasis on reducing business risks and comparing the average cost of capitol. In
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because it accounts for the beta. Using the CAPM model‚ the new Star Company cost of equity is calculated as 9.4% and the WACC is determined to be 9.14% at the 9.5% debt rate. In addition to the estimation of the cost of equity‚ Star Appliance Company is also considering increasing their current debt ratio of 9.5% to the industry average of 19%. With a higher current debt ratio the WACC will be lower‚ at a rate of 8.24%. The cost of equity of each product was valued using the beta from the industry averages
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10% 15% ? 60% 12% 16% ? WACC = W d * K d + W e * K e Debt/Assets Wd After-Tax Cost of Debt We Cost of Equity Cost of Capital 0% 0 8% 1 12% 0.12 = 12% 10% 0.1 8% 0.9 12% 0.116 = 11.6% 20% 0.2 8% 0.8 12% 0.112 =11.2% 30% 0.3 8% 0.7 13% 0.115 =11.5% 40% 0.4 9% 0.6 14% 0.12 = 12% 50% 0.5 10% 0.5 15% 0.125 =12.5% 60% 0.6 12% 0.4 16% 0.136 = 13.6% b. Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Compare this balance
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analysis should not include interest expense. In order to calculate the NPV of a project the cash flows are discounted with the cost of capital rate (WACC). The cost of capital rate (WACC) is a weighted average of the costs of debt and common equity. The cost of debt contains the interest expense (Kd). Thus when discounting the cash flows with WACC we are subtracting the interest expenses. If we where to include the interest expenses in our cash flow analysis we would end up double-counting this
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above‚ since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected‚ the financing mix can impact the valuation. Management must therefore identify the "optimal mix" of financing—the capital structure that results in maximum value. (See Balance sheet‚ WACC‚ Fisher separation theorem; but‚ see also
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understanding and knowing the cost of capital‚ Marriott is able to select relevant investment projects for the company‚ determine incentive compensation‚ and repurchase undervalued shares when needed. The returns of a project were found by discounting the appropriate cash flows against the appropriate hurdle rates. Without knowing the cost of capital‚ Marriott would not be able to determine hurdle rates that would help Marriott’s growth. Also‚ knowing the cost of debt would allow Marriott to optimize
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BMCF 5103 CORPORATE FINANCE Dr. Nguyen Thi Hoang Anh Lecture 1: An Introduction to Corporate Finance Contents What is finance? What is corporate finance? The balance-sheet model of the firm Capital budgeting Capitalstructure The firm and thefinancial markets Forms of business organisation The goals of a corporation Agency relationships: stockholders versusmanagers‚ stockholders versus creditors Managers’ actions to maximise stockholder wealth Financial management
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ch. 16 question 15-1 CHAPTER 15 Capital Structure: Basic Concepts Multiple Choice Questions: I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: a. homemade leverage. b. dividend recapture. c. the weighted average cost of capital. d. private debt placement. e. personal offset. Difficulty level: Easy MM PROPOSITION I b 2
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specific items of capital should be included in the SIVMED’s WACC? Should before-tax or after-tax values be included? Should historical or new values be used? Why? Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis - common stock‚ preferred stock‚ bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component
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