or above normal economic performance? If ROA > WACC: * Company creates value for shareholders * Company generates a positive NPV (Net Present Value) * Company generates a positive EVA (Economic Value Added) (a) ROA = 14.3%‚ WACC = 12.8% Above normal economic performance (b) ROA = 4.3%‚ WACC = 6.7% Below normal economic performance (c) ROA = 6.5%‚ WACC = 9.2% Below normal economic performance (d) ROA = 8.3%‚ WACC = 8.3% Normal economic performance 5. Is it possible
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4. Explain investment risk 5. Estimate the cost of publicly traded equity capital (e.g.‚ exchange-listed common stocks) 6. Estimate the cost of private equity capital 7. Explain how capital costs combine into a weighted average cost of capital (WACC) 8. Understand venture investors’ target returns and their relation to capital costs CHAPTER OUTLINE 7.1 IMPLICIT AND EXPLICIT FINANCIAL CAPITAL COSTS 7.2 FINANCIAL MARKETS 7.3 DETERMINING THE COST OF DEBT CAPITAL A. Determinants of Market
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other significant conditions such as project risk. However it can as well be seen that this strategy may conflict with the objective‚ as the company uses the hurdle rate to evaluate potential investments where the cost of equity is higher‚ then the WACC would appear higher as well(hurdle rate)and distract the company to invest in some
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The Capital Assets Price Model (CAPM)‚ is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return‚ which is often used to estimate a cost of equity (Wikipedia‚ 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:
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Question 1 Call options on XYZ Corporation’s common stock trade in the market. Which of the following statements is most correct‚ holding other things constant? Answer Correct Answer: The price of these call options is likely to rise if XYZ’s stock price rises. Question 2 Other things held constant‚ the value of an option depends on the stock’s price‚ the risk-free rate‚ and the Correct Answer: All of the above. Question 3 Which
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estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis‚ the students identify the key value drivers and distinguish‚ on a qualitative basis‚ the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need for students to estimate a segment WACC draws out their abilities to critique
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Jon Bennett Star River Case Analysis Page 1 of 7 FIN 461: Spring 2008/9 Initial Assessment: An initial look at the ratio analysis reveals that the annual sales-growth rate has been holding around 15%. This is perhaps the only good news from the analysis. A performance discontinuity makes its appearance in FY 2000 as a drop in operating margin. This was a result of a 21% increase in production costs and expenses and a 20% increase in admin and selling expenses. There was also an inexplicable 95%
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strengths and weaknesses of debt and equity financing? Discuss possible sources of debt financing. Propose a strategy for Pontrelli to obtain project financing. Compare and contrast EVA and MVA. Define WACC. How is WACC calculated? What are its strengths and weaknesses? Why is understanding WACC important? Calculate project viability‚ using the profitability index. Propose an alternate capital structure for Pontrelli. Develop an alternate project budget. What are the constraints? Create
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(EVA<0) means that is value destroying. Calculation EVA of PT. Krakatau Steel for 2014 start below. 1. Define the WACC Item Book Value % to MV Cost of Cap After tax CofC Cont. to WACC Short Term Debt 1‚092‚565.00 48.62% 9.22% 6.45% 3.139% Long Term Debt 262‚509.00 11.68% 9.35% 6.55% 0.765% Equity 891‚868.00 39.69% 10.78% 10.78% 4.277% 2‚246‚942.00 100.00% 29.35% Tax 30 % WACC 8.18 % 2. Define the WCR (Working Capital Requirement) Item 2013 2014 Working Capital Requirement +Inventory
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| - | 0.90 | 0.70 | β relevered (βl) | 1.37 | 1.09 | 1.27 | 1.29 | Cost of equity (Re) | 18.90% | 17.05% | 18.15% | 18.30% | Cost of debt (Rd) | 9.03% | 9.39% | 9.16% | 9.43% | Effective tax rate (t) | 43.68% | 43.68% | 43.68% | 43.68% | WACC | 8.68% | 12.35% | 12.69% | 10.51% | Overall‚ Contract Services division has the highest weighted average cost of capital and Lodging division has the lowest. Since different lines of business are different in nature‚ this estimation is reasonable
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