– Accept positive NPV projects Discount Rate • As we discussed‚ the discount rate is the weighted average cost of capital (WACC). D E WACC E ( rd )(1 t ) E ( re ) DE DE where t = tax rate‚ E(rd) = expected cost of debt D = amount of debt in capitalization E(re) = expected cost of equity E = amount of equity capitalization Discount Rate • To calculate the WACC using 1989 figures under the three strategies: 5‚204 12‚790 Prebid : (.09)(1 .34) (.168) .137 5‚204 12‚790 5‚204 12
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VALUATION TECHNIQUES Vault Guide to Finance Interviews Valuation Techniques How Much is it Worth? Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise‚ consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters‚ you should understand that the value
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Financial Management 1. Happy Valley‚ Inc. stock is valued at $51.40 a share. The company pays a constant dividend of $3.80. What is the required return on this stock? Po = D/Rs $51.40 = $3.80/Rs Rs = 7.39% 2. The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year‚ and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.15‚ the market risk premium is 5.50%
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Week 4 Assignment 4 MGM 6620 Managerial Finance Professor: Manuel V. Sicre Student Name: Zoraya Sandoval 01/28/2012 Chapter #11 11.1 Diversifiable and Nondiversifiable Risks. In broad terms‚ why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio‚ but not the level of systematic risk? Some of the risk in holding any asset is unique to the asset in question. By investing in
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6% | 6% | Cost of equity | 9.8% | 10.7% | 12.2% | WACC | 9.8% | 9.0% | 8.4% | EBIT | 1‚485.00 | 1‚485.00 | 1‚485.00 | Taxes 34% | 504.90 | 504.90 | 504.90 | EBIAT | 980.10 | 980.10 | 980.10 | Depreciation | 500.00 | 500.00 | 500.00 | Capital expense | (500.00) | (500.00) | (500.00) | Change in net working capital | 0.00 | 0.00 | 0.00 | (Free cash flow)FCF | 980.10 | 980.10 | 980.10 | Value of Assets (FCF/WACC) | 10‚001.02 | 10‚851.11 | 11‚701.19 | | | |
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When companies invest their money they need to earn a rate of return that exceeds their cost of capital. We can estimate a company’s cost of capital in the following way: WACC = (rD)(1-T)(WD) + (rS)(WS) Go to one of the databases from Part 1 of the Course Project and look up the most recent 10-K for your company‚ paying special attention to the balance sheet and the footnotes. Although we should use market value weights when determining a firm’s cost of capital‚ this may be difficult to
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On the other hand‚ when getting too low estimate on cost of capital‚ midland will estimate the new investment with higher NPV. Midland might waste much money on many bad investments which are overestimated. 2. Calculate Midland’s firm-wide WACC. Make sure you explain clearly your method and your choice of inputs. In particular‚ is Midland’s choice of market risk premium appropriate‚ and if not‚ what recommendations would you make and why? Material: a. Debt is long-term in nature
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assets P.P.E. Intangibles (Patents) Goodwill Accounts payable Invested capital: Costly WACC D/D+E x rd x (1 – taxrate) + E/D+E x re After-tax average Interest rate D = All the interest bank loans re= required rate of return = cost of equity = required rate of return demanded by shareholders rd = interest rate re>rd (Inventories + accounts receivable) - accounts payable = networking capital (NWC) ROIC target = WACC WACC + extra If a company wants to raise the ROIC‚ ebit has to go up‚ nwc down‚ ppe down
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concluding on a firm’s optimal capital structure‚ Opler and Titman (1994) discovered that it is substantially difficult to quantify. While Wrigley’s has been given a B/BB rating‚ due in part to their interest coverage ratio of 1.47; due to the fact that WACC has only increased 0.01%‚ it can be
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better served with the tax or other benefits that additional leverage would provide. In addition‚ this option could be a signal to the financial markets that MCI is trying to change their capital structure to move closer to their minimum WACC. As we know‚ minimizing WACC will maximize a firm’s value. The second option‚ open market repurchase‚ would likely send the message that MCI feels the stock is undervalued. However‚ the price of the stock would not likely rise as much as it would under a fixed
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