be issued. Calculate the firm’s composite‚ or weighted average‚ cost of capital. Identify some of the factors that affect the WACC—dividing them into factors the firm cannot control and those they can. Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. List some problems with cost of capital estimates. Lecture Suggestions
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To sustain further improvements to a company’s bottom line and profitability‚ Guillermo’s Furniture is completing a pro-forma cash flow analysis that includes net present value (NPV)‚ internal rate return (IRR)‚ and weighted average cost control (WACC) analysis’. The plan is to incorporate a merger of a high tech furniture business‚ a broker distributer business‚ or the status quo manufacturing. The issues driving these analysis decisions are the facts that a company located in Sonora Mexico relying
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Identify some of the factors that affect the overall‚ composite cost of capital. • Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. • List and briefly explain the three separate and distinct types of risk that can be identified‚ and explain the procedure many firms use when developing subjective risk-adjusted costs of capital.
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Case 1 (a) What was the critical catalyst that led Kodak to start taking the Japanese market seriously? until early 1980s when Fuji launched an aggressive export drive‚ attacking Kodak in the north American and European markets. ==================== (b) From the evidence given in the case do you think Kodak’s charges of unfair trading practices against Fuji are valid? Support your answer. The charges were very valid. the Japanese government helped to create a ‘ profile sanctuary’
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Sunday‚ March 15‚ 2009 COST OF CAPITAL AT AES Evaluating the Historical Capital Budgeting Method Currently AES employs Project Finance Framework. Project finance tends to be used in projects with tangible assets with predictable cash flows in which construction and operating targets can be easily established through explicit contract. The key to AES projects financing lies with the precise forecasting of cash flows. In effect‚ the possibility of estimating cash flows with an acceptable
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debt in the capital structure for which it uses an interest coverage target instead of debt to equity ratio to determine the ideal amount of debt to hold. Problems: In order to calculate the WACC (hurdle rate) for each division‚ many different variables need to be analyzed in detail so that the WACC is a good evaluator of the profitability of future projects. A firm can only use its own cost of capital to evaluate projects when the firm is a single product or single division firm. For conglomerate
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➢ Alternatively‚ EVA (Economic Value Added) = NOPAT – WACC (Invested Capital) can be applied to value the value of investment project. • Optimal Capital Structure ➢ Midland regularly reevaluated its debt levels and set long-term capital structure accordingly. ➢ Midland’s increasing borrowing capacity will shield additional profits from taxes. ➢ Midland’s target debt ratio is set based on each division’s annual operating cash flow and collateral value of its identifiable assets. ➢ Cost of
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Exam cases: Kodak Virgin Australia Post Pre-seen exam information Semester 2 2012 Global Strategy and Leadership © CPA Australia Ltd 2012 Case Scenario 1 Kodak case facts Eastman Kodak Company (Kodak) was founded in the late 19th century by amateur photographer George Eastman in Rochester‚ New York. With the slogan ‘you press the button‚ we do the rest‚’ Kodak gave consumers the first simple camera in 1888‚ making a cumbersome and complicated process easy to use and readily
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2001 to 2003. Students also need to determine each company’s weighted-average cost of capital (WACC) to estimate EVA. The primary objective of this case is to introduce students to the concepts and calculation of WACC and EVA. Suggested Questions: 1. What is the weighted-average cost of capital (WACC) and why is it important to estimate it? Who determines the WACC? 2. Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be prepared to explain your assumptions for
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risk premium. ➢ WACC should be estimated for the overall firm ▪ CAPM – equity beta vs. asset beta - see Section F • Compute a separate cost of capital (WACC) for the lodging business‚ contract services business and restaurant business. ➢ How was cost of debt measured of each division? Should the cost of debt differ across three divisions? Why? ➢ What is/are suitable comparables? Why? ➢ What cause each divisional WACC differ? ➢ What
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