interest rate of 2% per year and use the proceeds to repurchase shares. The firm operates in the Modigliani-Miller world with no taxes. a) What are Northrop’s firm value‚ cost of equity‚ and WACC before the recapitalization? b) What are Northrop’s firm value‚ equity value‚ debt value‚ cost of equity‚ and WACC after the recapitalization? Compare you results to those in a) and interpret the differences. c) What happens with Northrop’s equity values and share price at the time of the announcement
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requested that this cost of capital estimate and analysis be completed for the next board of directors meeting. Section 1 of this report discusses and analyzes the firms cost of capital. It begins with a discussion of the weighted average cost of capital (WACC)
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would you identify an organization’s optimal cost of capital? Is the cost of capital increasing or decreasing for most companies? What is meant by Weighted Average Cost of Capital (WACC)? What are the components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the impact on WACC when an organization needs to raise long term
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Salem Telephone Company-Case Study Peter Flores‚ President of Salem Telephone Company‚ believes that a computer subsidiary company (Salem Data Services) appears to be unprofitable. And because of this‚ he must decide and determine whether it is actually unprofitable and consider whether changes in prices or promotion might improve profitability by using the Break-Even point analysis. But before we come out to any solutions‚ we must discuss Salem Data Services accounting report
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After calculating the FCF for all the projects‚ we got the IRR’s for each project. We got an IRR of 0% for project A‚ 32% for project B‚ 34% for project C‚ and 43% for project D. Similarly we got the NPV for each project using a WACC of 10% and 35%. Using the 10% WACC we got an NPV of -$1‚229‚980 for project A‚ and $3‚016‚880 for project B‚ and $5‚281‚910 for
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run? ●After borrowing $ 3 billion dollars what would the impact on the company’s debt rating be? ●What’s the impact on the company’s share value; would the recapitalization increase the company’s share value? ●What’s the impact on the company’s WACC‚ an increase or decrease? ●Would recapitalization increases the EPS of the company? Hypothesis “Whether the proposed leveraged recapitalization is efficient for Wrigley
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capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows. The value of a firm’s operations is the present value of its expected future FCF discounted at its WACC. Some
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recommended a strong buy while others expressed misgivings and recommended a hold. At this point‚ North Point Group decided to do their own analysis in order to decide if Nike shares should be purchased for the fund. The weighted average cost of capital (WACC) is the rate that a company is expected to pay its debt and equity holders to finance its assets. It is the minimum return that a company must earn on existing asset base to satisfy its owners‚ creditors‚ and other providers of capital or they will
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selected. Consequently‚ the company’s growth would be hurt as well. Hence‚ the calculation of costs of capital for use as hurdle rates is essential for managing the company’s growth. The cost of capital is computed using Weighted Average Cost of Capital (WACC) technique which is the weighted average of cost of equity and cost of debt of the firm or division. The cost of debt is the current borrowing rate at the time of the analysis (1988). The costs of floating rate debt and fixed rate debt are determined
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Average Cost of Capital (WACC) Calculations The weighted average cost of capital (WACC) is the discount rate used in the discounted cash flow analysis. Usually‚ the WACC is the weighted average of the cost of debt (Kd) and the cost of equity (Ke)‚ since debt and equity are the most common sources of funds for the companies. In general‚ the formula for WACC is the following: As implied by the formula itself‚ if a company does not have interest-bearing debts‚ then its WACC would equal to its cost
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