equity Pretax cost of debt After Tax cost of debt rd Market value weights of: Wd Debt We Equity bL Levered beta Rf Risk-free Rate Market Premium RM Ke Cost of equity WACC EBIT - Taxes (34%) EBIAT + Depreciation - Capital expense Change in Net Working Capital Free Cash Flow Value of Assets ( FCF/WACC) CASE # 31 0% Debt 100% Equity $ $ 20‚000 $ $ 20‚000 7.0% 4.62% $ 34% $ $ $ $ $ $ 0 1 0.8 7% 8.6% 13.88% 13.88% 4‚206.00 1‚430.04 2‚775.96 1‚000
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risk‚ therefore‚ the cost of capital has to be a pertinent return for that particular division. 2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations. Is Midland’s choice of EMRP appropriate? If not‚ what recommendations would you make and why? The appropriate EMRP to use in the 2007 WACC calculation is 6.0% as listed in Table 2. Team 1 compared this rate to real-world data using the average annual total return on common
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Midland’s cost of capital 1. I choose the rate of 30-year U.S. Treasury bonds in 2007 (4.98%) as the risk free rate in the 2007 WACC calculations. The reason is that majority of large firms and financial analysts report using long-term yields for bonds to determine the risk-free rate. Rf=0.0498 2. Cost of debt‚ which is determined by adding the spread to Treasury (1.62%) to the rate of 30-year treasury bonds in 2007. Rd=0.0498+0.0162=0.066 3. Cost of equity‚ the EMRP (5%) and D/E (59
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Top of Form Grading Summary These are the automatically computed results of your exam. Grades for essay questions‚ and comments from your instructor‚ are in the "Details" section below. Date Taken: 10/13/2013 Time Spent: 2 h ‚ 49 min ‚ 52 secs Points Received: 52 / 100 (52%) Question Type: # Of Questions: # Correct: Multiple Choice 9 5 Essay 1 N/A Grade Details - All Questions 1. Question : (TCO D) A stock just paid a dividend of D0 = $1.50. The required rate
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Marriott cost of capital Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott’s use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd)‚ the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case. Cost
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price we have applied the Weighted Average Cost of Capital Method of Valuation. The WACC method implies that the firm’s weighted average cost of capital represents the average return that the company must pay to its investors‚ both debt and equity holders‚ on after tax basis. We assume that the company maintains constant Debt/Equity ratio and the WACC remains constant all the time. We first calculate the WACC by the formula: [pic] Where‚ re = rf + β(rm – rf) = 6.71% + 0.73 x 6% = 11.09%
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Points) Sexton Inc. is considering Projects S and L‚ whose cash flows are shown below. These projects are mutually exclusive‚ equally risky‚ and not repeatable. Please determine the NPV‚ IRR‚ Profitability Index and Payback for these two Projects. WACC: 10.25% Year 0 1 2 3 4 CFS -$2‚050 $ 750 $ 760 $ 770 $ 780 CFL -$4‚300 $1‚500
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came up with 9.83% of WACC. Next‚ we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow‚ we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo. If we look at the sensitivity analysis‚ we find as WACC increases‚ the percentage
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Marriot Case Brief 1. What is the weighted Average Cost of Capital for Marriot Corporation? WACC for Marriott Corp is 11.89 WACC of divisions: Lodging 10.29‚ Restaurant 13.49‚ Contract Services 13.615 a) What risk-free rate and the risk premium did you use to calculate the cost of equity? We used 8.95% as the risk free rate (LT Government Debt) and the MRP we used was 7.43%‚ which means are expected market return is 8.95+7.43=16.38% b) How did you measure Marriott’s cost of debt? We added
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division and company. Only project with positive NPV discounted by hurdle rate will be invested‚ and the total return of Marriott up to all projects invested. Though there are many subjective aspects in estimation of WACC‚ common view and accepted formula will be adopted to calculate WACC‚ discretion if prudent used. Key factors 1. Key factors of debt a) Tax rate Tax rate is based on state policy and net income of the company. Since tax rate of 1988 is not expected to change‚ tax rate of 1987 is
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