Chapter 10 The Cost of Capital Learning Objectives After reading this chapter‚ students should be able to: Explain what is meant by a firm’s weighted average cost of capital. Define and calculate the component costs of debt and preferred stock. Explain why the cost of debt is tax adjusted and the cost of preferred is not. Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. Briefly explain the two alternative approaches
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evaluate the stock of Advanced Info Service: 1) Discount Dividend Model (DDM) 2) Relative Method Discount Dividend Model We assume that the dividends are trending upward at a stable growth rate. (b= 0.329‚ Rm= 10%) P0= D1/ (k-g) k= Rrf + (Rm- Rrf)b P0= 5.44/(5.303-5.281) k=3+(10-3)0.329= 5.303 P0= ฿247.27 D1= D0*(1+g) g = b*ROE D1= 4.26(1+5.281)= 26.757 g= (reinvested earnings/book value)*84.46% g= 5.281% Forecasting Growth Right now‚ the stock’s intrinsic value
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Charles Darwin was quoted in 1842 describing the Belize Barrier Reef as "the most remarkable reef in the West Indies" (Encyclopedia). This description still holds true today. The Belize Barrier Reef Reserve System‚ which includes the Belize submarine shelf and its barrier reef is the world’s second largest barrier reef system and the largest reef complex in the Atlantic-Caribbean area (Programme-wo‚ 2009). What makes a reef like the Belize Barrier Reef system so special is that coral reefs are the
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1) How much importance should be given to the energy cost situation? Michael Burton’s proposal to expand into new energy efficient products is justified by increasing interest in the public and private sectors to reduce energy costs. At the highest level of government‚ the Obama administration has tied the US economy’s energy policy with its future success and competitiveness with other global powers. In a speech on June 2009‚ President Obama specifically mentions the Energy Department’s plans to
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FINC 501 Case Study # (3) Bond Valuation Sami & Sara are vice-presidents of Manama Insurance Company and co-directors of the company’s pension fund management division. A major new client‚ the Northwestern Municipal Alliance‚ has requested that Manama Co. presents an investment seminar to the mayors of the represented cities‚ and Sami and Sara‚ who will make the actual presentation‚ have asked you to help them by answering the following questions. a. What are the key features of a bond? b
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Chapter 15. Mini Case | | | | | | | | | | | | | | | | | | | | | | Situation | | | | | | | | | | | | | | | Assume you have just been hired as a business manager of PizzaPalace‚ a regional pizza restaurant chain. The company’s EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course‚ your instructor stated that most firms’ owners
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STOCK ANALYSIS REPORT - Exxon Mobil Corporation (XOM) –August 15th ‚ 2011 [pic] Industry: Oil and Gas Operations Sector: Energy Recommendation: SELL Price: $74.29 (as of August 15th 2011‚ 4:00pm ET) Intrinsic Value: $52.10 or 42.6% overvalued Fundamentals Grade: A Investment Style: Large Cap Blend CORPORATE INFORMATION [pic] Location: 5959 Las Colinas Boulevard Irving‚ TX 75039 Phone: 972-4441000 Fax: 972-4441348 Web Site: http://www.exxonmobil.com/ Employees: 83‚000 Exchange:
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CHAPTER 13: CAPITAL STRUCTURE AND LEVERAGE 1. A firm’s business risk is largely determined by the financial characteristics of its industry‚ especially by the amount of debt the average firm in the industry uses. a. True b. False ANSWER: False 2. Financial risk refers to the extra risk borne by stockholders as a result of a firm’s use of debt as compared with their risk if the firm had used no debt. a. True b. False ANSWER: True 3. A firm’s capital structure does not affect its free cash
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4%. What is your estimate of the stock’s current price? I used the financial calculator online for this problem‚ but we can find it manually... To solve this problem we need to first calculate the required rate of return‚ which is Rs=Rf+B(Rrm-Rrf)‚ so 7.5+(11.5-7.5)*1.2=12.3... So‚ D0 would be 2‚ D1 would be 2.4‚ D2 would be 2.88‚ and D3 would be 3.08. We then have to calculate the PV for the dividends‚ which is 4.42. We have to calculate P2‚ which came out to 46.10. After adding up the PV values
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Describe briefly the legal rights and privileges of common stockholders Common stockholders are known as owners of a corporation. Therefore they have the following rights and privileges: • To receive stock certificates as per evidence of ownership. • To vote during stockholders’ meetings. A firm’s common stockholders have the right to elect its firm’s directors‚ who in turn elect the officers who organize the business. • The right to information and to receive financial reports regarding the firm
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