The Cost of Capital 1 Background As investors desire to obtain the best/highest return on their investments in securities such as shares (Equity) and loans to companies such as debentures (Debt)‚ these returns are costs to the companies paying these Dividends (on equity) and Interest (on Debts)! It all depends on the perspective from which we chose to view the calculation (are we Earning or Paying?) Companies MUST consider the cost of financing they receive in the form of equity or debt if they
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Outstanding Shares 2 b. Book Value of Equity 2 c. Price per Share 2 d. Earnings per Share 3 e. Debt Interest Coverage Rations and Financial Flexibility 3 f. Outstanding Shares 3 Wrigley’s Current Weighted Average Cost of Capital (WACC) 4 Debt Proceeds to Pay a Dividend or Repurchase Shares 4 Wrigley’s Recapitalization 5 Appendices 5 i. Objectives This report seeks to answer the following five questions about William Wrigley Jr.: 1. In the abstract‚ what is Blanka
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1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC- The weighted average cost of capital is the rate (percentage) that a company has to pay to its creditors and shareholders to finance assets. It is the “cost” of their worth. Companies raise money from many different types of securities and loans and the various required returns are what make up the cost of capital. WACC is used to decide if an
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Guillermo Furniture Store University of Phoenix FIN 571/December 10‚ 2012 Marcel Santiz In week one‚ the author conducted an analysis on the Guillermo Furniture Store location‚ company finance‚ and the production of work. For this current week‚ the author will analysis some alternative for Guillermo Furniture Store working capital policy by implementing multiple valuation techniques with an emphasis on reducing business risks and comparing the average cost of capitol. In
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because it accounts for the beta. Using the CAPM model‚ the new Star Company cost of equity is calculated as 9.4% and the WACC is determined to be 9.14% at the 9.5% debt rate. In addition to the estimation of the cost of equity‚ Star Appliance Company is also considering increasing their current debt ratio of 9.5% to the industry average of 19%. With a higher current debt ratio the WACC will be lower‚ at a rate of 8.24%. The cost of equity of each product was valued using the beta from the industry averages
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deciding to go ahead with the 777 project. The basic intuition is to accept the project if the IRR is more than WACC or reject it if IRR is less than WACC. The defense division of Boeing was relatively more stable and was thriving during gulf war whereas commercial aircraft business became volatile. Therefore β for commercial division is more appropriate for calculating WACC for evaluating the commercial 777 jet project. NYSE composite index presents a better portfolio than S&P 500 and
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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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Executive Summary Based on our analysis regarding competitive advantage‚ company comparison‚ financial data and operational excellence‚ we believe UPS will be a better performer in the long run as compared to FedEx. Competitive Advantage UPS has a first mover advantage over FedEx‚ beginning air delivery service in 1929. Although FedEx was the first to own and operate their own planes and introduced the innovative “hub and spoke” distribution pattern‚ UPS leads in specialized transportation and logistics
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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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