result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L ’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However‚ you believe that the economy is about to recover‚ and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased‚ and their cash flows will not be affected by the change
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hurdle-rate system. The tasks for the student are to resolve the debate‚ estimate weighted average costs of capital (WACCs) for the two business segments‚ and respond to the raider. Suggestions for complementary cases: “Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi‚ 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital. “Phon-Tech Corp.”
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could differ for each division. This is the most logical approach due to the fact that the projects related to a particular division should be evaluated using the division’s WACC rather than the corporation’s WACC. 3) What is the Weighted Average Cost of Capital for Marriott Corporation? In order to calculate the WACC for Marriott’s Corporation I’m going to use the following formulas: 1. Weighted Average Cost of Capital: 2. Levered Beta: Marriott’s structure: D= 60%
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scenario. There is a scenario in which the WACC changes independently off all other variables to about 22%. In this situation‚ the build option would provide an NPV of around $17‚000. That NPV while positive is nowhere near what Tremont would like out of their investment. The base IRR for the build option is low because it generates most of its value in the later years of the project. This makes it more sensitive to changes in the discount rate. The WACC can go as low as 25% below the base value
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ROC | 9.10% | 11.0% | Book Value | $11.4 Billion | $4.6 Billion | Market Value | 75% | 25% | Growth | Revenue grew 3% in last 4 years | Sales grew 40% last year | The approach to a long-term solution for Teletech Corporation required a new WACC calculation of each business segment and a final determination when it comes to using the current hurdle rate or a risk-adjusted hurdle rate. Also a review of Teletech’s value creation formula of economic profit used to make strategic decision about
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capital (WACC)? Choose one answer. | a. Long-term debt. | | | b. Accounts payable. | | | c. Retained earnings. | | | d. Common stock. | | | e. Preferred stock. | | Correct Marks for this submission: 1/1. Question 2 Marks: 1 For a typical firm‚ which of the following sequences is CORRECT? All rates are after taxes‚ and assume the firm operates at its target capital structure. Choose one answer. | a. re > rs > WACC > rd. | | | b. rs > re > rd > WACC. |
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BBB ‚ which results in a decrease in WACC from 11.47% to 9.95%. By doing this‚ Deluxe ’s WACC is minimized‚ yet the bond rating is still at investment –grade rating; plus‚ the firm will have a financial flexibility of $872 million‚ and an increase in its equity value per share by $35.34. This memo explains in detail the calculation of the current WACC‚ the current intrinsic equity value‚ the unused debt capacity at different ratings‚ and the recommended WACC as well as the estimated increase in
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describes that WACC can only measure investment of similar risk class and for that reason we don ’t think the way Marriott uses to estimate cost of capital makes sense since we believe that WACC and net present value of the project must be separately calculated for each part of the company and for each of their projects. 2. What is the weighted average cost of capital for Marriott Corporation? The WACC for Marriot Corp is 9.76%--See calculations bellow: In order to find the WACC for Marriot
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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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market-determined variables in the sense that they are based on investors’ required returns. False 4. The before-tax cost of debt‚ which is lower than the after-tax cost‚ is used as the component cost of debt for purposes of developing the firm’s WACC. False 5. The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt. False 6. The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends
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