A company with low gearing is one that is mainly being funded or financed by share capital (equity) and reserves‚ whilst the one with a high gearing is mainly funded by loan capital. Now the question to address is which of the two (equity and debt) is cheaper to the company? The answer is that cost of debt is cheaper than cost of equity. This is because debt is less risky than equity and the tax advantage of debt over equity as discussed below: Risk: debt is less risky than equity because: • the
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What is the nature of the investment that is under consideration and what are the sources of value (cost savings and revenue increases)? The investment proposed by Bob Prescott‚ an on-site longwood woodyard‚ would reduce operating costs by processing tree-length logs‚ as well as increase revenues by selling shortwood. Cost Savings: In 2006‚ Worldwide Paper’s Blue Ridge Mill had to purchase shortwood from competitor‚ Shenandoah Mill. The new woodyard would begin operations in 2008‚ thus
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present day calculation. In order to properly calculate the cost of debt for Worldwide Paper Company‚ we calculated a new weighted average cost of capital using current market and company data. The formula for weighted average cost of capital‚ or WACC‚ is (% of debt on the company’s balance sheet multiplied by the after-tax cost of debt) + (% of equity on the balance sheet multiplied by cost of equity). To determine percentages of the debt and equity on
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Patrick Belgica‚ Robie Escaño‚ Ergo Galang‚ Roberto Villanueva‚ Jill Borlong‚ Li (Michael) SPFINMAN / G05 Prof. Alan Jezrel Solomon‚ MBA 1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure. In order to find the WACC‚ we need to find the cost of the components of the capital structure and their proportion in the total capital. Cost of Debt – To find the cost of debt‚ we use the details of the bonds issued by Rollins
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FIN 401-061 RYERSON UNIVERSITY Midterm Exam – March 4‚ 2013 – Prof. M. Toffanin Version A Time allowed: 2 hours Aids allowed: Closed book except for an 8 1/2” by 11” crib sheet. Answer all multiple choice questions on the scan sheet. All questions are worth 1 mark each. There are 30 multiple choice questions. Good luck! 1. Which version of the exam do you have? This is a free mark – take it. Make sure you answer it correctly‚ though. A) Version A B) Version B Please use the following
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the WACC due effect of the tax shield and hence the value of the firm. Aurora Borealis LLC‚ like any other hedge fund‚ banks on instantaneous rise and fall in stock prices than the long term investment in growth and stability of the firm. The hedge fund plans to short the stock at the moment it rises to the optimal level due to strong signals the hedge fund is trying to pursue. Effect of recapitalization on WACC The current WACC of Wrigley is 10.9%. Since it is all equity firm the WACC is same
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answer for question 1-3. Need a summary of my solution for conclusion. About 2 pages total. Question : Nike‚ Inc.: Cost of Capital 1 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? 2 If you do not agree with Cohen’s analysis‚ calculate your own WACC for Nike and be prepared to justify your assumptions. 3 Calculate the costs of equity using CAPM‚ the dividend discount model‚ and the earnings capitalization
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requirements‚ and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project‚ and he concluded that both projects have risk characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted. A. What is capital budgeting? Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions? Answer: [Show S11-1
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SPR 13 | Group Assignment 1 | UST Case Study | 2/19/2013 | | | | Question 1: In order to calculate the impact of the leverage recapitalization on UST’s value‚ we used the WACC and APV methods to calculate its value before and after the recapitalization. WACC Method Using the WACC method‚ we first derived UST’s return on assets (rA). Since we are given the firm’s market capitalization‚ debt and cash‚ we calculated the current Enterprive Value of UST. We were then able to derive
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earnings as evaluated is questionable. Under the value-creating investment prong‚some projects were considered as future equity cash flows using the cost of equity as the discount rate instead of the hurdle rate based on the project or divisional WACC. The calculation of EVA (economic value added) was manipulated by a “capital charge” and the “capital charge” was
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