WEIGHTED AVERAGE COST OF CAPITAL 1. Calculate the current cost of capital of Secure and Safe on a weighted average basis Capital structure Type Details $50‚000‚000 bonds 5.5% coupon $20‚000‚000 preferred stock Par value $50 per share Dividend $2.75 per share p.a $25‚000‚000 book value of common stock Cost of capital is 12% Firm’s marginal tax rate is 30%. Cost of debt (issuance of bonds) According to the book Finance for Managers (2015)‚ we get the real cost of debt by taking out the tax liability
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1. Marriott uses its’ cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets‚ investing in projects that increase shareholder value‚ optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with returns below their respective WACC which will result
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Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand‚ expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time‚ Marriott had three main lines of business‚ lodging‚ contract services and restaurants‚ with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning‚
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division‚ restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate‚ and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all‚ we will determine the cost of debt‚ cost of equity and the capital structure for the whole company. Then we will compute for the tax rate‚ and calculate the WACC
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Case #3 “Marriott Corporation” The Cost of Capital” What is the weighted average cost of capital for the Marriott Corporation and cost of capital for each of its divisions? – What risk-free rate and risk premium did you use to calculate the cost of equity? – How did you measure the cost of debt? – How did you measure the beta for each division? Solution What risk-free rate and risk premium did you use to calculate the cost of equity? – Risk-free rate proxy The risk-free
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1. Which of the following would increase the likelihood that a company would increase its debt ratio in its capital structure? a. An increase in costs incurred when filing for bankruptcy. b. An increase in the corporate tax rate. c. An increase in the personal tax rate. d. None of the statements above is correct. ANSWER: B An increase in the corporate tax rate would mean that firms would get larger tax breaks for interest payments. Therefore‚ firms have an incentive to increase interest payments
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corn‚ during the first harvest year. Income before Royal Taxes is equal to the harvested sacks of corn less operating costs. Sihathor’s farm harvested 48‚600 sacks of corn during the year and had a total operating cost of 12‚317 sacks of corn‚ which resulted in income before Royal Taxes of 36‚283 sacks of corn. Pemsah’s farm harvested 35‚300 sacks of corn and had a total operating cost of 8‚080 sacks of corn‚ which resulted in income before Royal Taxes of 27‚220 sacks of corn. Amenhotep required a Royal
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problems to estimate the cost of capital Before starting to describe the problems associated to the estimation of the cost of capital‚ it is extremely relevant to describe its meaning: according to Investopedia‚ it is “the cost of funds used for financing a business”. In order to carry out this process‚ the companies can only be financed through equity; only through debt; or using a “combination of debt and equity” - in this particular case it is a “overall cost of capital derived from a weighted
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Nike‚ Inc Cost of Capital NorthPoint Large Cap Fund was considering whether to buy Nike’s stock or not. Nike was experiencing declines in sales growth‚ declines in profits and market share. However‚ Nike decided it would increase exposure in mid-price footwear and apparel lines‚ and it also commits to cut down expenses. The market responded with mixed signals to Nike’s changes. Kimi Ford‚ the portfolio manager at NorthPoint‚ did a cash flow estimation‚ and ask her assistant‚ Joanna Cohen to estimate
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The Cost of Capital in Multinational Firms Monique N. Mixon University of Maryland University College FIN 630‚ 04 November 2012 Turnitin.com=_________ ABSTRACT This paper examines the cost of capital for multinational firms and determines that the multinational firm should use the weighted average cost of capital (WACC) to evaluate international and domestic investment decisions and to magistrate the enactment of subsidiaries domestically and internationally. This paper also discusses
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