CAPITAL BUDGETING Cost of Capital Evaluating Cash Flows Payback‚ discounted payback NPV IRR‚ MIRR The Cost of Capital • Cost of Capital Components – Debt – Common Equity • WACC Should we focus on historical (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make decisions which involve raising and investing new capital. So‚ we should focus on marginal costs. What types of long-term capital do organizations use? nLong-term debt nEquity Weighted
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as the discount rate in net present value (NPV) project appraisal techniques.1 The weighted-average cost of capital (WACC) represents the overall cost of capital for a company‚ including the costs of equity and cost of debt‚ weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Where: Re
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Hershey’s in Europe By: Kathryn Frehse Business 330 Principles of Marketing Professor Susan Craver December 3rd‚ 2012 The Hershey Chocolate has been dominating the market in chocolate in the United States for many years. They have expanded to different countries. But‚ they have not expanded to Europe. This is an excellent market where the Hershey chocolate would have competition‚ but they would also thrive in such a large market. With the right promotion‚ integration‚ and careful checks
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1. Why do think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain. (10% weighting) Answer The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold‚2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same risk
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weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement: a) Weighting of Capital Structure: Use of book values of capital rather than the market values b) Cost of Debt Calculation: Incorrect method for calculating debt c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firm’s marginal tax rate 2. Revised Calculation of WACC: WACC reflects the weighted average
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TANMAY GUPTA tg2311 American Chemical Corporation Cost of Capital : Collinsville Investment [pic] Where: Re = cost of equity Rd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V = E + D Tc = corporate tax rate D/V and E/V Ratio: Since the target debt ratio of Dixon is given to be about 35%‚ we assume the target D/V ratio for Colinsville investment to be the same. Hence the E/V ratio
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WACC Example: A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also‚ the firm: - has 1‚000‚000 common shares outstanding - current price $11.25 per share - next year’s dividend expected to be $1 per share - firm estimates dividends will
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The Cost of Capital Project: Internet Version {December 2009} By Wm R McDaniel‚ PhD Objective The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting datum to estimate the discount rate to use in the net present value analysis of new projects or of termination decisions. The student will later need to know the technique for application in some case
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Approach is to analyze financial maneuvers separately and then add their value to that of the business. | APV always works when WACC does‚ and sometimes when WACC doesn’t‚ because it requires fewer restrictive assumptions | Some limitations amount to technicalities‚ which are much more interesting to academics than to managers. | | Less Prone to serious errors than WACC. | Income from stocks- as opposed to bonds- may be taxed differently when the investor files a personal tax return : this usually
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What is the 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? 1.1 The definition of WACC Weighted average cost of capital(WACC)‚ is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could
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