between 1990 and 2024. 2. First step of calculating cost of capital for 777 project is calculating Boeing’s levered beta. To calculate Boeing’s levered beta‚ we have to calculate unlevered betas of Grumman‚ Northrop‚ Lockheed and Lockheed then we have to take average of these betas. (0.369) Boeing’s levered beta is calculated as 0.373. Then we calculate Boeing’s commercial division beta which is 0.964. Then we calculate cost of equity (14.3%) and cost of debt (9.67%). Then finally the cost of capital
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34%). What type of investments would you value using Marriott’s WACC? Cost of debt：8.95%+1.3%=10.25% Cost of equity：8.95%+1.64*7.43%=21.14% 實際beta=1.11，根據exhibit 1，長期債務為24.99億美元，權益價值為35.64億美元(30元*118.8百萬股)，可以得出D/V=24.99/35.64=41%標的資本結構D/V=60%，所以必需做出調整。 V=D+E，D/V=41%，E/V=59% Beta of asset=(E/V)*beta of equity=0.59*1.11=0.655 Beta of equity=(V/E)*beta of asset=(1/0.4)*0.655=1.64 Risk free rate：美國30年期政府公債利率為8.95% Risk premium：exhibit 5 S&P500和美國長期政府公債的利率差為7.43% WACC：(1-0.34)*0.6*10.25%+0
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Answer Case Study 2 Midland Energy Resources (as a whole company) According to the article‚ the beta of Midland Energy is 1.25. beta=1.25 cost of equity re = rf + beta * (EMRPs) EMRPs = 5.0% We assume that the company will run for next 30years‚ so the rate of risk free is 4.98% rf = 4.98% Cost of Equity: rE = rf + beta * (EMRPs) = 4.98% + 1.25 * 5% = 11.23% Market Value of Equity = $134114m (Exhibit 5) Cost of Debt 30years‚ rD = rf + spread to treasury = 4.98% + 1.62% = 6.60% Market
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For a long‐term investor the geometric average with treasury bonds (4.84%) is used. For a short‐term investor the arithmetic average with treasury bills (7.92%) is used. In both cases the longest possible period is taken. Solutions 1. In December 1995‚ Boise Cascade’s stock had a beta of 0.95. The treasury bill rate at the time was 5.8%‚ and the treasury bond rate was 6.4%. The firm had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate marginal tax rate was 36%. a. Estimate the ex
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real world including terrorism and infectious disease‚ Boeing would need to weigh all considerations before making final decision to proceed the plan. In this case‚ we cautiously made assumptions when estimating cost of debt‚ commercial-defense beta ratio‚ risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2. Capital Budgeting Decision Rule According to detailed
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Introduction The Randolph Corporation is a multidivisional producer of electric sanders‚ sandpaper‚ industrial grinders and sharpeners‚ and coated ceramics. The Corporation also has a real estate development division. The diverse product lines of the company divide the corporation into four divisions‚ namely‚ real estate‚ ceramic coatings‚ equipment manufacturing and home products. The Randolph Corporation Stock performed below expectations recently‚ when compared to other player in the industry
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project has to meet. He factors that determine the cost of capital are risk free rate‚ risk premium and beta asset for the project. 3. Ameritrade has a short history of trading‚ so its equity beta cannot be computed precisely using its own historical data. Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments? Why? Even though the project will
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Problems and Questions – Risk Measurement and Hurdle Rates in Practice Rem.: Use 5.5% as your equity risk premium‚ for T. Bonds‚ where none is given‚ and 8.5% as your short term ERP. 1. In December 1995‚ Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8%‚ and the Treasury bond rate was 6.4%. a. Estimate the expected return on the stock for a short-term investor in the company. b. Estimate the expected return on the stock for a long-term
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increasing its level of debt until it is financed with 60% debt and 40% equity. The beta on its common stock at the current level of debt is 1.5‚ the risk free rate is 6%‚ the market risk premium is 4%‚ and LIC faces a 40% Tax rate. a. What is LIC’s current cost of Equity? b. What is LIC’s Unlevered Beta? c. What will be the new beta and new cost of equity if LIC recapitalizes? Equations: Stock’s beta is the relevant measure of risk for
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Chapter 10) • Midland’s target debt ratio is different from its actual debt ratio ➢ Table 1 vs. Exhibit #5 ➢ Current equity beta (1.25) does not reflect the “true” equity beta at target debt ratio for Midland. How to solve this issue? Hamada Equation ➢ Asset beta (unlevered beta) – reflects business risk in the market in which a firm operates. ➢ Equity beta (levered beta) – considers
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