flows of the firm. The discount factor can be calculated with the WACC formula. (The calculation of the WACC formula is done in question 3) In this case we would choose a time horizon from 10 years‚ regarding to the data quality and the uncertainty of the evolution of Midland Energy Resources future cash flows. In addition the time horizon of the cash flow estimation should be equal to the used maturity of the risk free rate in the WACC calculation. Midland Energy Resources will repurchase shares
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capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? (Points : 10) Long-term debt Accounts payable Retained earnings Common stock Preferred stock 5. (TCO E) 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 projects are equally risky‚ as are all of
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What type of investments would you value using Marriott’s WACC? The weighted average cost of capital measures the average risk inherent in the corporation and overall capital structure of the entire firm. Noting that low asset betas for less cyclical industries such as utilities and household products‚ versus the much higher asset betas of high-tech firms and luxury retailers‚ we can’t deal with the varied businesses in the same way when doing the valuation since that different lines of businesses
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model (CAPM) along with the WACC when estimating the cost of equity. Both of the methods‚ along with firm-to-firm discrepancies‚ will be described below. Weighted-Average Cost of Capital With the WACC‚ corporations develop a standard to use against capital market alternatives. Moreover‚ since capital is an opportunity cost for investors‚ if a firm does not earn more than its cost-of-capital‚ it does not make money for the investors. The three variables used in a WACC model are “K” representing
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capital – the risk-adjusted return on capital must be higher than the cost of capital. The Weighted Average Cost of Capital (“WACC”) is the rate a company will pay to finance all of their assets. Depending on the capital structure of a firm‚ a proportionate weighted percentage will be applied towards the financing of debt‚ equity‚ and preferred stock. Because the WACC is calculated using weighted averages for debt and equity‚ it is a good measurement of the cost to the company for financing its
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be issued. Calculate the firm’s composite‚ or weighted average‚ cost of capital. Identify some of the factors that affect the WACC—dividing them into factors the firm cannot control and those they can. Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. List some problems with cost of capital estimates. Lecture Suggestions
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cost of capital (WACC) for The Walt Disney Company. According to The Walt Disney Company’s Form 10-K filing for the fiscal year ended September 29‚ 2012‚ “The Walt Disney Company‚ together with its subsidiaries‚ is a diversified worldwide entertainment company with operations in five business segments: Media Networks‚ Parks and Resorts‚ Studio Entertainment‚ Consumer Products and Interactive.” Specifically the comparison between debt and equity will be summarized using the WACC for The Walt Disney
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To sustain further improvements to a company’s bottom line and profitability‚ Guillermo’s Furniture is completing a pro-forma cash flow analysis that includes net present value (NPV)‚ internal rate return (IRR)‚ and weighted average cost control (WACC) analysis’. The plan is to incorporate a merger of a high tech furniture business‚ a broker distributer business‚ or the status quo manufacturing. The issues driving these analysis decisions are the facts that a company located in Sonora Mexico relying
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Identify some of the factors that affect the overall‚ composite cost of capital. • Briefly explain how firms should evaluate projects with different risks‚ and the problems encountered when divisions within the same firm all use the firm’s composite WACC when considering capital budgeting projects. • List and briefly explain the three separate and distinct types of risk that can be identified‚ and explain the procedure many firms use when developing subjective risk-adjusted costs of capital.
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Sunday‚ March 15‚ 2009 COST OF CAPITAL AT AES Evaluating the Historical Capital Budgeting Method Currently AES employs Project Finance Framework. Project finance tends to be used in projects with tangible assets with predictable cash flows in which construction and operating targets can be easily established through explicit contract. The key to AES projects financing lies with the precise forecasting of cash flows. In effect‚ the possibility of estimating cash flows with an acceptable
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