(See Appendix 1) The slope of the regression line is the levered beta: βL = 0.7933. (See Appendix 2) We plug the levered beta into the equation below in order to find the unlevered beta: βU = βL / [1+(D/E) (1-T)] βU = 0.7933 / [1+(13.9/1472.8)(1-0.48)] = 0.789 We use the unlevered beta in order to estimate the Business Risk faced by the company in 1981‚ since at this date‚ the company has almost no debt. Indeed‚ unlevering the beta removes any beneficial effects gained by adding debt to the firm’s
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of capital structure and effective tax rate‚ is then applied to the Capital Asset Pricing Model‚ using the U.S. Government 10-year bond as the risk-free rate and the spread between the S&P 500 composite and the U.S. Government 10-year bond rate. Beta is based on the last five years of monthly return data. The resulting corporate WACC is 10.22%. However‚ new investments in the different divisions requires the application of a hurdle rate that reflects the business risk of that particular unit
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231.45 3. award: 1.00 point National Electric Company (NEC) is considering a $40 million project in its power systems division. Tom Edison‚ the company’s chief financial officer‚ has evaluated the project and determined that the project’s unlevered cash flows will be $2.6 million per year in perpetuity. Mr. Edison has devised two possibilities for raising the initial investment: Issuing 10-year bonds or issuing common stock. NEC’s pretax cost of debt is 7.2 percent‚ and its cost of equity is
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Midland Energy/Sample 2 Midland Energy Resources‚ Inc. Midland Energy Resources‚ Inc. is a global energy company that operates in oil and gas exploration and production (E&P)‚ refining and marketing (R&M)‚ and petrochemicals. Midland’s most profitable segment is its E&P division which produces 67% of the company’s net income (Exhibit 3). Its largest division is R&M with the Petrochemical division being the smallest. The primary goals of Midland’s financial strategy are to fund substantial overseas
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COST OF CAPITAL (Et al) EXERCISES 1. Consider the following data regarding the cost of capital of an italian auto manufacturing firm: * Capital structure includes 40% debt * Industry average unlevered beta is 1.8 * 10 year Italian Government bond yield is at 4.5% * JP Morgan has issued an estimate for Expected Market Return at 8.5% * Euribor is 2% * Before tax cost of debt = 5% * Tax rate = 30% Please calculate the weighted average cost of capital (WACC) for
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value = 6‚753‚044‚375.39 (b) Value of control = $3‚014‚634‚396.19 III) Enterprise value of Compaq = $39‚429‚435‚518.34 IV) (a) Unlevered beta for year 1-5 = 1.1 Unlevered beta after year 5 = 0.8 (b) Equity beta for year 1-5 = 1.25 Equity beta after year 5 = 1 (c) Firm value of combined firm = $46‚922‚470‚722.61 (d) Value from synergy = $3‚754‚625‚225.07 Solution 2: Refer
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for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash flows‚ but it does implicitly include the interest cost in the WACC. If he insists that the interest payments are explicitly shown‚ you should use the FTE method. 5. You can estimate the unlevered beta
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25 YR 1. Cash Flow Forecast $40 million $50 million $60 million Assume also that the CAPM holds. 11.2 Compute the expected year 1 restaurant cash flow for Marriott. 11.3 Find the covariance of the cash flow with the market return and its cash flow beta. 11.4 Assuming that historical data suggests that the market risk premium is 8.4 percent per year and the market standard deviation is 40 percent per year‚ find the certainty equivalent of the year 1 cash flow. What are the advantages and disadvantages
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Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand‚ expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time‚ Marriott had three main lines of business‚ lodging‚ contract services and restaurants‚ with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning‚
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Valuation Discount rates play a key role in the valuation of discounted cash flows. Three rates are generally used to calculate the present value of future cash flows: the cost of equity (Ke)‚ the weighted-average cost of capital (WACC)‚ and the unlevered cost of capital (Ku). The Cost of Common Equity The cost of common equity is the building block for all of the other discount rates. The cost of common equity is based on the expectations that Starbucks’ investors have about the return they
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