are BEA’s new beta and cost of equity if it has 40% debt? - BEA’s new beta βL = βLใหม่ = (0.87) βLใหม่ = 1.218 - BEA’s cost of equity RsL = RF + βL(RM - RF) = 6% + (1.218)(4%) = 10.872% c. What are BEA’s WACC and total value of the firm with 40% debt? - BEA’s WACC WACC = = (9%)(1-0.4)(0.4) + (10.872%)(0.6) = 8.683% - BEA’s total value of the firm V0 of firm = ‚ g = 0% = = = = $103‚188‚000 Problems (26-9) International Associates (IA) is about to commence operations
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broke. Question #5 How does WACC change over time? What do you think might drive the changes? WACC is the opportunity cost of investing in a company‚ or the expected return of shareholders and debt holders. WACC consists of all capital sources and includes common stock‚ preferred stock‚ short-term debt and long-term debt in the calculation. WACC is the average costs of capital financing‚ and tells us how much a company has to pay for each dollar of financing. WACC for any company will fluctuate
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Percentage of; Calculation Weight by % Bonds Additional bond 50 million / 1‚120 million 45 million / 1‚120 million 4.46 4.02 Preferred stock 1‚000 million / 1‚120 million 89.29 Common stock 25 million / 1‚120 million 2.23 Total 100 iv) New WACC calculation WACC = (% of debt) (After-tax cost of debt) + (% of preferred stock) (cost of preferred stock) + (% of common stock) (cost of common
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while PepsiCo’s EVA has been increasing (see Exhibit 1.1). Coca-Cola’s NOPAT has decreased in recent years as a result of slowing sales growth and worsening profit margins. If it were not for Coca-Cola’s decreasing WACC‚ its EVA would decrease more rapidly. If Coca-Cola used a WACC of 12%‚ about the average of the past seven years‚ its EVA would have been $445‚000‚000 in 2000. PepsiCo was able to more than double their EVA in
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practice problems Questions 1. What does the WACC measure? 2. Which is easier to calculate directly‚ the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity? Assume you are an outsider to the firm. 3. Why are market-based weights important? 4. Why is the coupon rate of existing debt irrelevant for finding the cost of debt capital? 5. Under what assumptions can the WACC be used to value a project? 6. How should
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model and the weighted average cost of capital through calculation of the cost of capital for Marriott as a whole. Dan Cohrs is faced with making recommendations for the hurdle rates at Marriott Corporation and its three divisions utilizing CAPM and WACC. This case illustrates how to calculate beta based on comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference
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’s common stock is selling for $8.59 per share‚ and its expected growth rate in earnings and dividends is 5 percent. What is Global ’s cost of common stock? a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00% WACC with Flotation Costs Answer: a Diff: E [iv]. An analyst has collected the following information regarding Christopher Co.: • The company’s capital structure is 70 percent equity‚ 30 percent debt. • The yield to maturity on the
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−investment + CFN CF1 CF2 + +L+ 2 (1 + WACC) (1 + WACC) (1 + WACC) N where‚ in a simple situation: equity debt WACC = equity + debt (cos t of equity ) + equity + debt (cos t of debt )(1 − tax rate ) Using debt for financing has a tax advantage in that interest payments are tax deductible. This tax deductibility is a source of value for the firm. In the normal NPV calculation‚ this additional value is accounted for in the WACC. However‚ in many cases the capital structure
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should undervalued at discount rates below 11.2% * The market responded mixed signals to Nike’s changes. Kimi Ford has done cash flow estimation‚ and asks her assistant‚ Joanna Cohen to estimate cost of capital. WACC Methodology: * The weighted average cost of capital (WACC) is the rate (expressed as a percentage‚ like interest) that accompany is expected to pay to debt holders (cost of debt) and shareholders (cost of equity) to finance its assets. * It is the minimum return that a
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to assess its two business segments. They look at return of capital on both segments and apply the same hurdle rate‚ which is also used for performance assessment. The hurdle rate was established using Teletech’s Weighted Average Cost of Capital (“WACC”) as a representation of the opportunity cost of money. Some of the company’s senior management‚ chiefly Rick Phillips‚ Executive Vice President of the Telecommunications Services segment‚ believe the company should be using different hurdle rates
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