WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an investment is worth
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the CAPM model‚ for example‚ have to say about risk? What is it? How is it approached? The traditional finance framework uses discounted expected future cash flow to determine the NPV of the project. The amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. People are rational and adverse to risk and need incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words
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Case Solution Cost of Capital at Ameritrade | | • Executive summary: Formed in 1971 and listed in March 1997‚ Ameritrade has been one of the most successful players in the deep- discount brokerage sector. Ameritrade’s two major sources of revenue‚ Transaction income (brokerage commissions‚ clearing fees‚ and payment for order flow) and Net interest revenues that were generated from net balance
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shareholders’ value: the discounted cash flow techniques to evaluate potential investments allow the company to invest only in profitable projects. Therefore‚ it can maximize the use of its cash flow to gain profits. Optimize the use of debt in the capital structure: because firms with lower percentage of debt have higher value‚ Marriott uses this strategy to increase its value and thereby increase it profitability. Repurchase undervalued shares: By buying back its undervalued shares‚ Marriott can
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Summary Wanting to add Nike’s share to her portfolio‚ Kimi Ford asked her new assistant‚ Joanna Cohen‚ to estimate Nike’s cost of capital. Cohen‚ later‚ came up with the cost of capital of 8.4% that was contradicted to Ford’s cost of capital of 12%. This report points out flaws of Cohen’s assumption and recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation‚ we will use CAPM‚ the dividend discount model (DDM)‚ and the earnings capitalization model (ECM)
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9-204-109 REV: OCTOBER 23‚ 2006 MIHIR DESAI Globalizing the Cost of Capital and Capital Budgeting at AES In June 2003‚ Rob Venerus‚ director of the newly created Corporate Analysis & Planning group at The AES Corporation‚ thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public‚ AES had become a leading independent supplier of electricity in the world with more than $33 billion in assets
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LECTURE 10 COST OF CAPITAL CLASS QUESTIONS 1. Roland Corporation’s last dividend (D0)‚ which was paid yesterday‚ was $2.50. The firm has a constant growth of 18.8%. The firm’s beta coefficient is 1.2. The required return on an average stock in the market is 13 percent‚ and the risk-free rate is 7 percent. Roland’s A-rated bonds are yielding 10 percent‚ its risk premium is 4% and its current stock price is $30. Which of the following values is the most reasonable estimate of Roland’s cost of retained
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Ameritrade’s managers should also consider what taking on these programs would do to its capital structure. They might have a certain debt to equity ratio they wish to maintain‚ or perhaps there would be covenants put on their contracts requiring them to maintain a certain debt to equity ratio while their loan was outstanding. Ameritrade should use a 6.10% risk free rate when calculating its cost of capital. This is the average of the 20 year bond annualized yield to maturity (on August 31‚ 1997)
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PPD 244 – Land Use Policy 5/21/13 10:44 AM CAPITAL FACILITIES AND LAND USE PLANNING - aligning land use planning policy with capital facilities policy - “adequate public facilities ordinances (APFO)‚” or‚ “concurrency” | coordinating growth so it occurs at the same time as facilities expansion PROCESS 1. ID areas of development priority (boundaries‚ tiers‚ zones) 2. Capital Improvements Program (CIP) | how are we getting the money and how we are going to spend it | water‚ sewer‚ parks‚ schools
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Harvard Business School 9-298-101 Rev. March 18‚ 1998 Marriott Corporation: The Cost of Capital In April 1988‚ Dan Cohrs‚ vice president of project finance at the Marriott Corporation‚ was preparing his annual recommendations for the hurdle rates at each of the firm ’s three divisions. Investment projects at Marriott were selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. In 1987‚ Marriott ’s sales grew by 24% and its return on equity stood
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