recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation‚ we will use CAPM‚ the dividend discount model (DDM)‚ and the earnings capitalization model (ECM) to see the different in each and suggest the most suitable one. To sum it up‚ Ford is suggested to add Nike’s shares to its portfolio. Cohen’s Flaws According to the Cohen’s exhibits‚ there are 2 main flaws in her calculation of cost of capital and they are: 1. It’s correct that she used WACC since the
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Cost of Capital (WACC) • Capital structure components should be measured on a market value basis‚ not a book value or historic basis • Use a target capital structure rather than the current or historic capital structure • T always means the incremental tax-rate • Debt includes long-term debt‚ financing leases‚ short-term debt‚ operating leases used as permanent financing‚ off-balance financing transactions • If cash flows are real‚ first compute nominal WACC‚ then subtract inflation
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final decision to proceed the plan. In this case‚ we cautiously made assumptions when estimating cost of debt‚ commercial-defense beta ratio‚ risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2. Capital Budgeting Decision Rule According to detailed free cash flow forecast for the 7E7 project from 2004 to 2037‚ Baseline estimated the Internal Required Return (IRR)
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their divisions. The divisions are Telecommunications Services and Products and Services. They use the hurdle rate based on the cost of capital which is a rough estimate of the Teletech’s WACC. They calculate it at 9.3% based on the cost of capital‚ beta‚ and WACC. 2. Please estimate the segments WACCs for Teletech (see worksheet Exhibit 1). As you do this‚ carefully note the points of judgment in the calculation. 3. Interpret Rick Phillips graph (Figure 2). How does the choice of constant
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estimate? 2. Calculate Midland’s firm-wide WACC. Make sure you explain clearly your method and your choice of inputs. In particular‚ is Midland’s choice of market risk premium appropriate‚ and if not‚ what recommendations would you make and why? 3. Should Midland use a single corporate hurdle rate (i.e. a firm-wide WACC) for evaluating investment opportunities in all of its divisions? Why or why not? 4. Compute a separate estimate of the WACC for the E&P and R&M divisions. Again‚ make sure
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FIN-516 – WEEK 2 - HOMEWORK ASSIGNMENT PROBLEM BASED ON CHAPTER 15 – WACC AND THE HAMADA FORMULA Bickley Engineering Company has a capital structure of 30% Debt and 70% Equity. Its current Beta is 1.3‚ and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley? Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The
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Week One Discussion Questions • What is the capital market? How is the primary market different from the secondary market? In your opinion‚ are these markets efficient? Why? • What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after Sarbanes-Oxley was passed? Provide examples to support your answer. • What ratios measure
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at par‚ as against Mr. Brinepool assumption that the rate of return for the preferred stock is stand at 6%. With the preferred stock selling at $70‚ the rate of return should be‚ rpreferred = D / Po = $6/$70 = 0.086 or 8.6% In calculating the WACC‚ I reflected the market values (not book value) in consistency with your priority in investor rate of return expectations‚ as
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Billabong Dividend Policy to similar firms 14 4.4 Relationship Between the Company’s Characteristics and Dividend Policy 15 4.5 Alternatives to Dividend Payments 16 4.6 Optimal Dividend Policy 16 5.0 Valuation 18 5.1 Weighted Average Cost of Capital (WACC) 20 5.2 Estimation of Share Price 23 5.3 Sensitivity Analysis 25 5.4 Comparison between the calculated and actual share price 28 5.5 Investment Decision 28 6.0 References 29 7.0 Appendix 30 1.0 Introduction Company Overview Billabong was
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Bus M 401 Dixon Case Estimate of WACC for Collinsville Plant The WACC for Collinsville‚ according to our estimations‚ came up to about 16.22% (Exhibit I). We took the average of the unlevered betas of comparable companies‚ 0.91‚ and relevered it according to Dixon’s target capital structure. Dixon’s 5-year historical debt ratio was 27.5%‚ but this approach would not be reliable due to its steep downturn debt ratio from 51% in 1975 to 6% in 1979. Thus‚ we thought that the best estimate of the
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