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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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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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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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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ROC | 9.10% | 11.0% | Book Value | $11.4 Billion | $4.6 Billion | Market Value | 75% | 25% | Growth | Revenue grew 3% in last 4 years | Sales grew 40% last year | The approach to a long-term solution for Teletech Corporation required a new WACC calculation of each business segment and a final determination when it comes to using the current hurdle rate or a risk-adjusted hurdle rate. Also a review of Teletech’s value creation formula of economic profit used to make strategic decision about
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Case Two Analysis Dixon Corporation: The Collinsville Plant Paul Candland & Lynn Chang October 1‚2013 WACC Calculation In order to calculate WACC‚ we need to first start with the beta of equity. We are given the beta of equity of 1.06 of Dixon as a firm in Exhibit 7. However‚ the beta given is not an appropriate measure of the systematic risk of the Collinsville Plant‚ because Dixon produces many other chemical products other than Sodium Chlorate. Therefore‚ in order to accurately capture
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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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Ejercicio ST-2 capítulo 7‚ Brigham‚ E.. (1992) Fundamentals of Financial Mangement‚Estados Unidos: Editorial The Dryden Press‚6a ed Lancaster Engineering Inc. (LEI) has the following capital structure‚ which it considers to be optimal: Debt 25% Prefered stock 15 Common equity 60 ---- 100% LEI’s expected net income this year is $34‚285‚72; its establish dividend payout ratio is 30 percent; its federal-plus-state
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cash flow to make it likely that it will meet its interest obligations. However‚ in reality firms operate in imperfect capital markets where there are transaction costs‚ taxes‚ bankruptcy and agency costs; all these factors make determination of optimal capital structure an important question firms need to
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