Preferred stock. All of the above are considered capital components for WACC and capital budgeting purposes. 2. A company has a capital structure which consists of 50 percent debt and 50 percent equity. Which of the following statements is most correct? a. b. c. d. The cost of equity financing is greater than the cost of debt financing. The WACC exceeds the cost of equity financing. The WACC is calculated on a before-tax basis. The WACC represents the cost of capital based on historical averages. In that
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changes in either the discount rate of the firm (i.e.‚ it’s WACC) or the cash flows of the firm. Leverage affects value through the change in WACC not in the cash flows of the firm. WACC = (Wd (1-t) Kd) + (We * Ke). With change in leverage‚ Wd will change‚ which in return will change the WACC. Why does the value of assets change? Where‚ specifically‚ do the changes occur? The value of assets change due to the change in WACC. Question 2: {draw:frame} {draw:frame} *As the firm
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V(A+B)>V(A)+V(B) Value driver:1)Eliminate overhead 3) Leveragen brom dname Pay its=D(P)(P-VC)-FC V(Pinkerton after)+V(CPP after)>V(Pinkerton before)+V(CPP before) V(Pinkerton after)+∆V(CPP)>V(Pinkerton before) NPV=∑FCF(Pink‚t)/(1+WACC)^t+∑∆FCFcpp.t/(1+WACC)^t t t Landing list: 1) Find WACC 2)Estimate FCFpink 3)Estimate∆FCFcpp 2 1. Use FCF analysis • Case provides information about value drivers of the acquisition • Combine with accounting information to estimate Free Cash Flows • Use method we discussed
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a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative‚ in which case it will be rejected. WACC: 10.00% Year: 0 1 2 3 Cash flows: -$1‚000 $450 $460 $470 Answer: 142.37 2. Choi Computer Systems is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s projected IRR can be less than the WACC (and even negative)‚ in which case it will be rejected
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Executive Summary We found the weighted average cost of capital for Marriott as a whole to be 9.68%. The divisions of Lodging‚ Contract Services and Restaurants had WACCs of 8.14%‚ 13.33%‚ and 9.63% respectively. The only variable between these divisions that remains consistent is the tax rate. Marriott has a target rate for each of the divisions’ capital structures‚ which affects their debt and equity betas. Also‚ there are stark differences between the betas in the segments‚ as well as the
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1. How would you describe HPL and its position within the private label personal care industry? Hansson Private Label (HPL) is a manufacturer of products such as soap‚ shampoo‚ mouthwash‚ shaving cream‚ sunscreen and other personal care products. Its mission is to be a leading provider of high-quality private label personal care products to America’s leading retailers. The main topic of this paper is to evaluate a new investment of 50 million for a private label manufacturing proposal by a
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concepts: * Interest payments are tax deductible as an expense for the corp‚ debt financing creates valuable ITS for the firm. * Can include value of ITS in several ways: 1. WACC METHOD; discount unlevered free cash flows using the weighted average cost of capital (WACC). Because we calculate the WACC using the effective after-tax interest rate as the cost of debt‚ therefore this method incorporates the tax benefit of debt implicitly through the cost of capital. 2. ADJUSTED PRESENT
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WACC before recapitalization Wrigley’s prerecapitalization WACC is 10.9%. The cost of equity assumes a risk-free rate of 5.65% for 20-year U.S. Treasuries (case Exhibit 7)‚ a risk premium is assumed 7% (or 5%)‚ and uses Wrigley’s current beta of 0.75 (case Exhibit 5). 4. WACC after recapitalization The increase in leverage will affect Wrigley’s WACC in at least three ways: 1. Cost of debt: Wrigley’s debt rating will change from AAA (consistent with no debt) to a BB/B rating reflecting
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14.35% Cost of debt = 0.10(1-0.35) = 0.065 WACC= 1*14.35%+0*0.065= 14.35%‚ (1+WACC= 15.35%) FCFF= EBIT (1-tax rate) +depreciation-capital expenditure- change in working capital Change in NFA = Ending NFA – Beginning NFA and Net earnings as EBIT (1-tax rate). Working capital = Current asset+1000- Current liabilities-cash Change in Working capital = Ending WC– Beginning WC Tax rate = 35% WACC= cost of equity Terminal Value= TV= FCFFn × (1+g)/ (WACC – g) Following table summarizes the impact
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Comparative study of risk and returns of BSE-200 stocks Kapil Malhotra 10FN051 Objective of the Analysis: The objective of my study is to understand the need to analyse the movement of the market and fulfilling them so as to achieve my goal of becoming better investor/ trader. Profit and loss are the two inseparable features of the stock market. But losses can be minimized and profits can be increased with the help of Technicals. I have done the analysis on the basis of the daily closing
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