and the financial stability of the company. Before one invests in a company‚ it is important for the investor to be aware of the company’s cost of capital‚ and to know what is the firm weighted average cost of capital (WACC). Within this report I emphasize the importance of WACC and why it is an important financial mechanism that all investors should utilize before investing in a company. I calculated Nike’s weighted average cost of capital into two separate parts to truly understand the pros and
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The Boeing 7E7 WACC Estimation In order to evaluate the prospective IRRs from the Boeing 7E7‚ we first try to estimate an appropriate required rate of return for accepting this project. The capital asset pricing model is applied to estimate the cost of equity of the commercial aircraft division: R_EC= β_EC*(R_M-R_f )+R_f where REC is the cost of equity capital of the commercial aircraft division. βEC is the beta for the commercial division of Boeing. This beta is used instead of the company’s
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investment of expanding production capacity at Hansson Private Label (HBL) and make a recommendation to Tucker Hansson. In this report‚ I will specifically focus on analyses of the project’s free cash flows (FCFs)‚ weighted average cost of capital (WACC) and net present value (NPV). With a sensitivity analysis‚ it can help us to observe how change in some key project variables would make the project stronger and weaker. This report can provide efficient information for Hansson to evaluate the potential
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$600‚000 annually for the next 4 years. Given the project is an extension of their current operations‚ what is the net present value of the this project if the corporate tax rate is 35. D/E = 1.5‚ D/V = 1.5/2.5‚ E/V = 1/2.5‚ re = 28%‚ rd = 10% WACC = (1.5/2.5)*0.10*(1-0.35) + (1/2.5) *0.28 = 15.1% FV = 0‚ PMT = 600‚000‚ n =4‚ r = 15.1% → PV = 1‚709‚527.73 NPV = 1‚709‚527.73-1‚000‚000.00 = 709‚527.73 Take the project 2. Suppose the market value of a firm’s equity is worth $100m and the market
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FBE 421 Marriott Corporation ------------------------------------------------- Introduction Founded in 1927‚ Marriott Corporation has become one of the leading food service companies in the United States. As of 1987‚ Marriott recorded a profit of $233 million on sales of $6.5 billion and retained a high sales growth rate of 24%. Marriott runs on three major lines of business lodging‚ contract services‚ and restaurants. Lodging division which includes 361 hotels generated 41% of 1987 sales
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using 60 trading days data are 1.45 and 1.62 respectively. If the weighted average cost of capital (WACC) of this project could be lower than its internal rate of return (IRR) with the estimated beta of 1.62‚ the estimated beta of 1.45 would not cause the project to be rejected. Therefore‚ the analysis uses the estimated beta calculated against NYSE composites index‚ which is 1.62‚ to compute the WACC. Risk premium 4.35% Cost of Equity The standard approach to estimation cost of equity
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1. How does Marriott use its estimate of its cost of capital? Does this make sense? Marriott has defined a clear financial strategy containing four elements. To determine the cost of capital‚ which also acted as hurdle rate for investment decision‚ cost of capital estimates were generated from each of the three business divisions; lodging‚ contract services and restaurants. Each division estimates its cost of capital based on: Debt Capacity Cost of Debt Cost of Equity All of the above are
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following events would REDUCE its WACC? a. The market risk premium declines. b. The flotation costs associated with issuing new common stock increase. c. The company’s beta increases. d. Expected inflation increases. e. The flotation costs associated with issuing preferred stock increase. 2. Duval Inc. uses only equity capital‚ and it has two equally-sized divisions. Division A’s cost of capital is 10.0%‚ Division B’s cost is 14.0%‚ and the corporate (composite) WACC is 12.0%. All of Division A’s
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Chapter 9 Cost of Capital 1. What is the WACC? a. Weighted Average Cost of Capital- most firms employ different types of capital‚ and because of their differences in risk‚ the difference securities have different required rates of return. Typically=debt‚ preferred stock and common equity. 2. What precautions must we take when measuring the WACC to use for capital budgeting decisions (future investment)? b. The company’s current and recent past book and market value structures
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11 - 1 11 - 2 Choosing the Optimal Capital Budget Finance theory says to accept all positive NPV projects. Two problems can occur when there is not enough internally generated cash to fund all positive NPV projects: Increasing Marginal Cost of Capital Externally raised capital can have large flotation costs‚ which increase the cost of capital. Investors often perceive large capital budgets as being risky‚ which drives up the cost of capital. (More...) An increasing marginal
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