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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both on top-line growth and operating performance. The company’s cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC). In my analysis‚ I will examine why WACC is important in decision-making and I will show how WACC for Nike Inc. is calculated correctly. Also‚ I will calculate the company’s cost of equity using three different models: the Capital Asset Pricing Model (CAPM)‚ the Dividend Discount Model (DDM) and
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value of firm by providing appropriate tax shields. This will give Wrigley a rating of BB/B‚ and as a result the interest rate charged will be 13%. Chandler knows that maximum value will be achieved when WACC is minimized and she is estimating the impact of recapitalization on cost of equity and WACC. Management is being forced to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares because Blanka Dobrynin is trying to buy a large stake in the
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Chapter 13: 13.4 CF0 = (110‚000) ; CF1-CF10 = 19‚000 ; WACC = 10% NPV = 6‚746.78 ; The company should replace the old machine for a new one. 13.6 Year 0 Net Cash Flow = Machine Price + Cost of Install + Increase in Net Working Capital Year 0 = $1‚080‚000 + $22‚500 + $15‚500 = ($1‚118‚000) Depreciation Year 1 = ($1‚080‚000 + $22‚500) x 0.3333 = $367‚463 Depreciation Year 2 = ($1‚080‚000 + $22‚500) x 0.4445 = $409‚061 Depreciation Year 3 = ($1‚080‚000 + $22‚500) x 0.1481 = $163‚ 280 Net
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Q1: Barrowing can create a value if it is within a feasible point‚ beyond than that it might have a negative impact on the company value. A company can benefit from the tax shield through borrowing which would increase the value. The change in WACC would result to a change in the value of the assets. Q2: The increase in value gets apportioned based on the market value weights of Debt and Equity. Based on the calculation‚ 50% to debt and equity‚ market value weights equals to 43% debt and
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Wal-Mart stores INC. WACC analysis Wal-Mart Stores‚ Inc. is one of the biggest American multinational retail companies that operate chains of large discount department stores and warehouse stores. Wal-Mart is the world’s largest company by revenue‚ the biggest private employer in the world with over two million employees and the largest retailer in the world and also one of the world’s most valuable companies in terms of market value and is also the largest grocery retailer in the US. Wal-Mart
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The William Wrigley Jr. Company Case Report Ying Suan Lo Julianne Mills Nick Lim Vinson Chen Glen Hamilton Table of Contents 1.0 1.0 Introduction Identifying opportunities for corporate financial restructuring was typical for Blanka Dobrynin‚ a managing partner of the hedge fund Aurora Borealis LLC. In 2002‚ with the then debt free William Wrigley Jr. Company (Wrigley) in her sights‚ she asked her associate Susan Chandler to conduct
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Thus using the market rate to calculate CAPM you use the Beta and market risk premium which are both based on the market rate and more accurate. Finally‚ their company WACC of 9% that they have calculated is incorrect and given the above calculations‚ their WACC using CAPM would be: [5.28(.5)+14.6(.5)]=9.94% and their WACC using Dividend-growth would be:
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