technology investments. Charles Schwab was chosen because they are Ameritrade’s closest competitor. The other companies were chosen because they had similar debt to equity ratios as Ameritrade. These firms focused more on equity than debt. The asset betas for each of the benchmark firms were calculated by taking the
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equity beta of 1.2939 was appropriate for the commercial division of Boeing. The levered equity beta was important to use due to its representation of the capital structure of Boeing and its value to the WACC calculation. This equity beta was calculated by removing the financial risk of four similar defense-oriented benchmark companies (over half of all revenues from their respective defense divisions). The Value Line betas of Lockheed‚ Northrop‚ Grumman‚ and McDonnell-Douglas were unlevered using
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Question 1: Is Congoleum a good LBO candidate? In other words‚ does this company have a lot of debt capacity? To judge if a company is a good LBO candidate the following are very important factors: low levels of debt in the target‚ stable cash flows‚ excess cash on-hand‚ assets that can be used as collateral to raise debt and no major capital requirements to keep the business running on an on-going basis. Congoleum is an ideal LBO candidate because: 1. Low level of debt – estimated long term debt
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30% Debt and 70% Equity. Its current Beta is 1.3‚ and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley? Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The remaining long term debt will be at 7%. The marginal tax rate will remain the same. What will be Bickley’s new Beta with this new 15/85 capital structure
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Exhibit 7a) using a methodology that incorporates country risk and other types of risk that arise in international investments into each project’s cost of capital. ?levered = ?unlevered/(E/C) = ?unlevered/(1-(D/C)) both ?unlevered and D/C can be obtained from exhibit 7a. Next: U.S. T-bill+ leveraged beta (U.S. risk premium) 4.5% + ?levered * 7% = cost of capital1 Add sovereign spread: Cost of capital1 + sovereign spread = cost of capital final 2. What is the value of the Pakistan
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Consider 100% equity financed firm § Beta = 1 E/V = 1! D/V = 0! § WACC =? E D WACC = × RE + × RD × (1 − TC ) = RE V V WACC = Cost of equity from CAPM [ ] WACC = RE = R f + β × E [RM ] − R f = E [RM ] Beta =1! 2 SML and WACC SML Expected Return WACC = E[RM] Rf [ R f + β × E [RM ] − R f ] β=1 Beta 3 Accept Projects Y and/or Z? Expected Return IRRz WACC = E[RM] IRRY SML Z Y Rf β=1 Beta 4 Accept Projects Y and/or Z?
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Problems and Questions – Risk Measurement and Hurdle Rates in Practice Rem.: Use 5.5% as your equity risk premium‚ for T. Bonds‚ where none is given‚ and 8.5% as your short term ERP. 1. In December 1995‚ Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8%‚ and the Treasury bond rate was 6.4%. a. Estimate the expected return on the stock for a short-term investor in the company. b. Estimate the expected return on the stock for a long-term
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stock to a deposit box; hence‚ it also doesn’t make sense to compare stocks with very short-term Treasury Bills. For the beta of Papa John’s equity (PZZA)‚ we regressed the monthly return on PZZA with the monthly return on the S&P 500 index. Through doing so‚ we determined that PZZA had a market beta of 0.53. (Please refer to the attached spreadsheet for calculations of beta.) We also used the Ibbotson estimate for market premiums based on data from 1926-2009. Specifically‚ we decided that over
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30% Debt and 70% Equity. Its current Beta is 1.3‚ and its Market Risk Premium is 7.5% Points. The current Risk Free Rate is 3.5%. Bickley’s marginal tax rate is 40%. What is the Unlevered Beta of Bickley? Bickley’s management would like to change its capital structure to 15% Debt and 85% equity by retiring its bonds yielding 8%. The remaining long term debt will be at 7%. The marginal tax rate will remain the same. What will be Bickley’s new Beta with this new 15/85 capital structure
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to find the beta‚ the risk of the new project‚ of Boeing’s commercial component. The beta was calculated by unlevering (removing the financial risk) and averaging the betas of Grumman‚ Northrop‚ and Lockheed‚ which are three primarily defense-oriented benchmark companies‚ using the following formula: ( . The average of these three Value Line betas equaled )( ) 0.5328. We then unlevered the total Boeing beta: ( =0.9883‚ and with the ) unlevered defense beta‚ we were able
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