Capital Structure Theories Capital Structure Capital Structure is the proportion of debt‚ preference and equity capitals in the total financing of the firm’s assets. The main objective of financial management is to maximize the value of the equity shares of the firm. Given this objective‚ the firm has to choose that financing mix/capital structure that results in maximizing the wealth of the equity shareholders. Such a capital structure is called as the optimum capital structure. At the optimum
Premium Finance Weighted average cost of capital Generally Accepted Accounting Principles
project‚ it is important to remember that WACC is only appropriate for an individual project. The many factors affecting WACC are: general economic conditions‚ market conditions‚ the firm’s operating and financial decisions‚ amount of financing‚ business risk‚ constant financial risk‚ and dividend policy. These factors have a direct impact on the variables used in calculating WACC. Such variables include the term structure of interest rate‚ the risk free rate‚ the beta‚ the market risk premium
Premium Stock market Capital structure Financial ratios
face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? Answer these questions by computing and evaluating the asset beta and the equity beta. To start with‚ we have to state the difference between business risk and financial risk. Business risk represents the risk of the firm’s assets when no debt is used. It is then the risk that is inherent to the firm’s operations. This risk is represented by the asset beta‚ β(a). Financial risk takes into
Premium Finance Stock market Stock
Evaluate reasonableness of the asking price of $94.6 million Effects of the acquisition on BF share price How BF have chosen to position itself among its competitors would affect the appraisal of SC 2.Background 1977 BF adopted long-range financial goals 1)Hurdle rates for investment - 14% after tax 2)Size of capital budget through 1980 3)Target capital structure 4)Dividend payout Objective of these goals was to “increase the value of the stockholders’ investment” Other objectives
Premium Stock market Stock Financial markets
CHAPTER 5 Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE | | | | |Brief | | | |A | |B | |Study Objectives | |Questions | |Exercises | |Exercises | |Problems | |Problems | | | | | | | | | |
Premium Revenue Generally Accepted Accounting Principles Inventory
equity (ROE). It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things: - Operating efficiency‚ which is measured by profit margin - Asset use efficiency‚ which is measured by total asset turnover - Financial leverage‚ which is measured by the equity multiplier ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity) ROI and ROE ratio The return on investment (ROI) ratio developed by Du Pont
Premium Generally Accepted Accounting Principles Financial ratios Investment
Application of Accounting Concepts Matching Principle & Accrual Concept Accrued / Prepaid Expense & Accrued or Advance Revenue To ensure an accurate matching of expenses and revenue under the accrual basis‚ it is necessary to include all revenue earned but not received and expenses incurred but not paid. Such adjustments comprise adjustments for : Accrued Revenue Accrued Expenses On the other hand‚ many recorded costs and revenues benefit more than one accounting period. Therefore‚ adjusting
Premium Generally Accepted Accounting Principles
Sustainable Growth Model Step 1: Profitability and Earnings Retention At the end of each year the return that Costco realizes on equity capital can either be reinvested back into the business or paid out to investors as dividends and common stock repurchases. If no dividends or share repurchases were made and earnings were reinvested back into the business at the same incremental rate of return‚ the company’s return on equity would hold constant over time. In reality‚ most companies‚ including
Premium Investment Financial ratios Generally Accepted Accounting Principles
CFP FINAL EXAM NOTES: Ch18: Capital budgeting & Valuation with leverage; *Overview of concepts: * Interest payments are tax deductible as an expense for the corp‚ debt financing creates valuable ITS for the firm. * Can include value of ITS in several ways: 1. WACC METHOD; discount unlevered free cash flows using the weighted average cost of capital (WACC). Because we calculate the WACC using the effective after-tax interest rate as the cost of debt‚ therefore this method
Premium Free cash flow Net present value Finance
delivery represents a tremendous business opportunity for the firm. However‚ before you make the initial investment this coming January‚ it is critical you consider the tax‚ risk‚ and revenue implications of the three proposed capital structures. Financial Analysis – See appendix for detailed methodology and calculations | Capital Structure | Discount Rate | Net Present Value | Flow to Equity Approach | All Equity | R0 15.8% | $1‚228‚485 | Adjusted Present Value Approach | $750k Debt in Perpetuity
Premium Finance Weighted average cost of capital Net present value