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? WACC is the weighted average cost of capital. It can be calculated as: WACC = (Weight of funding source 1) x (Cost of funding source 1) + … + (Weight of funding source n) x (Cost of funding source n) Usually this will be simply: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity) It is important to estimate
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Average 0.4 5.5% 15% 0 3% 10% 7.50% Above Average 0.2 5.5% 30% -11% 41% 25% Boom 0.1 5.5% 45% -21% 26% 38% 12% r(hat) - expected return 1.00% 9.80% 10.50% σ (std deviation) 0.0% 13.20% 18.80% 15.20% 3.40% CV 13.20% 1.90% 1.4% 0.50% beta -0.87% 88.00% CDIB’s economic forecasting staff has developed probability estimates for the state of the economy; and its security analysts have developed a sophisticated computer program‚ which as used to estimate the rate of return on each
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modern financial theory. It predicts the required rate of return of a security based on its risk‚ as measured by beta‚ and makes use of various simplifying assumptions. Hence‚ equilibrium condition would evolve with all investors choose to hold the same portfolio for risky assets‚ the “market” portfolio. However‚ following Fama and French’s study in 1992‚ numerous studies have suggested that beta is not sufficient in accounting for risk and recommend the inclusion of other variables. Most notably‚ Fama
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Appendix I C1: Equity = Stock Price x Number of Shares Outstanding = $42.09 X 271.5 = $11‚427.435 million C2: Using Adjusted Beta formula: Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79 C3: Using CAPM formula: KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89% C4: Using rearranged DGM formula: KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7% C5: Using redeemable bond formula: KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n KD=4.52% C6: Using WACC formula: Rwacc =4.52*10.19% + 8
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3. T F Management of a company generally prefers non-cumulative to cumulative share voting. 4. T F Since the returns of well-diversified portfolios move very much in line with the returns for all stocks in the market‚ portfolio betas are equal to the beta for the market which is 1.0. 5. T F People who employ technical analysis when investing do not believe that markets are weak-form efficient. 6. T F An investor is considering adding another investment to a portfolio. To achieve the
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Los Angeles‚ l CA 90024‚ U.S.A. Received June 1976‚ revised version received October 1976 Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a mathematical equivalence between the individual return/beta’ linearity relation and the market portfolio’s mean-variance efficiency‚ any valid test presupposes complete knowledge of the true market portfolio’s composition. This implies‚ inter alia‚ that every individual asset must be included in a correct test
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Marriot Corporation : the Cost of Capital. In front of Dan Chores is the issue of recommending three hurdle rates for each of Marriott Corporation’s three divisions‚ which have significant effect on the firm’s financial and operating strategies as well as its incentive compensation. Marriott Corporation had three major lines of business: lodging‚ contract services and restaurants. Also Marriott had its growth objective‚ to remain a premier growth company. The four components of
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a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond‚ the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market‚ a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in that market. A beta greater than 1 indicates that the firm is more heavily exposed to market factors than the average firm in that market. The formula I
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30% Debt and 70% Equity. Its current Beta is 1.3‚ and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley? Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The remaining long term debt will be at 7%. The marginal tax rate will remain the same. What will be Bickley’s new Beta with this new 15/85 capital structure
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able to compare them with the actual stock price and other information of their competitors. This essay will outline both the strengths and weaknesses of each of the models used‚ and how they apply to Kellogg’s. I will be particularly focusing on: Beta Calculations‚ Dividends Valuation Model (DVM)‚ Price to Earnings ratio (P.E Ratio)‚ PEG Ratio and Cash flow methods. Kellogg’s is a major producer of cereal and convenience foods‚ with their brands including cookies‚ crackers‚ toaster pastries and
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