premium is 4%. Assume that Constant Dividend Growth Model and CAPM give you the same estimate of the cost of capital for equity‚ what is the beta of its stock? By the Constant Dividend Growth Model: Cost of Equity = D/P+g = 0.2/20+6%=7% By CAPM‚ cost of equity = R(f)+ beta * market risk premium = 3% + beta* 4%‚ Set this to be equal to 7%‚ solve for beta: beta=1 3. Firm ABC has a cost of equity of 8%‚ a cost of debt of 5%. It stock is traded at $10/share‚ and has 10 million shares outstanding
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above exercise are the following: • • • • • • We believe that WHC’s revenue can grow at a rate in the range of 8%-10% Based on the steady cash flows of infrastructure businesses and the relatively low country risk of Hong Kong (embedded on the unlevered beta and the risk free rate respectively) we assume a discount rate of 9%-10% We believe that the capital structure post acquisition could easily support 68% debt to assets ratio (conservative based on DSCR of 2.5 and the capital structure put in place
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which is the cost of debt . Third‚ the cost of equity is next. The EMRP (5%) was taken out of the context of the case. The tax rate (39.73%) was from the average of amount of taxes paid between year 2004 to year 2006. We also need to calculate the unlevered beta through the formula‚ βu=(E/E+D)*βe+(D/E+D)*βd. βd=0 Because we cannot find the
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Mercury Athletic Footwear Ashutosh Dash Firm Value & Cash Flow Unlevered Free Cash Flow • FCF = EBIT (1-t) + DEP - ∆NWC - CAPEX Or • FCF = EBIT (1-t) - ∆NFA - ∆NWC • EBIT (1-t) or NOPAT is debt free income • Where do we pick up the interest tax shield? • Estimating FCF requires – Developing a reorganized Balance Sheet A Complex Reorganized Balance Sheet Assets Excess Cash NWC Liabilities 000 Debt 104117 Others 000 000 NFA (PPE) 32618 Hybrids Others 77332 Equity 214067 214067 Capital
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Cost of Capital at Ameritrade Christoph Schneider Ross School of Business Basic assumptions Tax Rate Beta Debt Leverage (D/V) Leverage (D/E) 1997 35.5% 0.25 0.00 0.00 1996 39.4% 1995 35.1% Average 36.7% Comparable companies’ βE Tax Rate Beta Debt Leverage (D/V) Leverage (D/E) Discount Brokerage Firms Charles Schwab Quick & Reilly Waterhouse Securities 1997 35.5% 1996 39.4% β E from Jan’92-Dec’96 2.30 2.20 β E from all months 2.35 2.30
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1. What does it mean if a company “trades at a discount”? Is Amtelecom Group Inc. (AGI) really trading at a discount? If the market value of a stock is lower than its intrinsic value‚ this stock is defined as “trades at a discount”. To figure out whether AGI stock is traded at a discount to comparable companies‚ as its management believed‚ we can simply apply multiple which comes from the average multiple of its comparable companies. Considering fluctuation of future after-tax earnings caused
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2012‚ we assume that the debt maintains at a fixed amount till the end of 2012 and the periodic payments will not have effect on the debt cost of capital. In order to use APV method to value the company from 2008 to 2012‚ we need to figure out the unlevered cost of asset-R(U) and cost of debt at initialization-R(D08-12) to discount the FCF back to 2007. According to Rubinstein & Ross the interest rate of the bond should be 5.5% at the initial leverage‚ so RD08-12=5.5%. And we expect to use the
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Nina’s Fashions Inc. Case Study There are 7 vital parts to completing this comprehensive analysis of whether Nina’s Fashions and their management should acquire the Chic Company. 1) Gather information regarding mergers and present it to Nina’s board of directors. 2) Discuss reasons and factors justifying mergers‚ including their benefits to society and each company. 3) Discuss the Pro’s and Con’s of a hostile versus friendly mergers‚ along with some data on how shareholders from
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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 different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft and the defense business. Thus‚ deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing’s overall corporate
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should the Cash Flows be valued for 2008-2012? The calculation of each cash flow required us to use the projections from AirThread Connections that are given in the Exhibit 1 of the case allowing us to know the Total Revenue‚ EBITDA‚ EBIT and the Unlevered Net Income to be able to compute the Unleveraged Cash Flow (UFCF) from 2008-2012. As well we used Depreciation & Amortization‚ Capital Expenditures and the assumptions established in AirThread Connections Exhibit 1 case to make the adjustments that
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