the value of a levered firm equals the value of an otherwise identical unlevered firm. Since Beta Corporation is identical to Alpha Corporation in every way except its capital structure and neither firm pays taxes‚ the value of the two firms should be equal. Modigliani-Miller Proposition I (No Taxes): VL =VU Alpha Corporation‚ an unlevered firm‚ is worth $100‚000 = VU. Therefore‚ the value of Beta Corporation (VL) is $100‚000. c. The value of a levered firm equals
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CASE STUDY HOMEWORK CORPORATE FINANCE PROFESSOR: G. BERTINETTI STUDENT Albert Maurer 1 The Situation: In 2010 a new company was created in order to enter into the food industry. They spent many months in studying the market‚ engineering the products and the commercial strategy‚ find out the production plants. At the end of 2010 the business plan is ready and the company has already participated to an exhibition where many potential customers said to be very interested to the project
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you measure the cost of debt for each division? Should the debt cost differ across divisions? Why? c. How did you measure the beta of each division? Case Hints and Suggestions The primary objective of this case is to show students how the CAPM is used to compute the cost of capital. Students learn to calculate beta based on comparable companies and to lever betas to adjust for capital structure. Students are asked to determine the appropriate risk-less rate and market risk premium. This
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MGT 6060 Financial Management Summer 2011 Prof. Jonathan Clarke Case 3: cost of Capital at Ameritrade Group Members: Kristin Fadeley Venkata Kuppusamy Benedikt Schroeder Yogesh Vasisht Manoj Vattakkunnel Question 1: What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? In a nutshell‚ Ameritrade’s management should do a cost-benefit analysis‚ comparing proposed investments into technology
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levels of debt shown in case Exhibit 3? Answer these questions by computing and evaluating the asset beta and the equity beta. To start with‚ we have to state the difference between business risk and financial risk. Business risk represents the risk of the firm’s assets when no debt is used. It is then the risk that is inherent to the firm’s operations. This risk is represented by the asset beta‚ β(a). Financial risk takes into account the firm’s leverage. The leverage will have an effect on
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Acova Case EM The purpose of this executive memo is to evaluate the justification to invest in a potential LBO candidate‚ Acova Radiateurs‚ and estimate the possible bidding price‚ keeping the minimum annual return required by Baring Capital’s investors at 30%-35%. 1. Justification of the Potential Transaction We evaluate the prospects of Acova LBO transaction for Barings and come into a conclusion that Acova is a good potential LBO candidate is justified. a. Strong Cash Flow Generation
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Forstmann‚ Little & Co. Historical Perspective LBO Candidate Special Committe e Key Players Valuation Risk Factors Post LBO Plans Final Takeover Valuation RJR NABISCO- Pre Bid Valuation Assumptions: Adjusted Beta -0.78 D/E Ratio-0.71 Tax-0.35 Unlevered Beta-0.53 Risk-free rate-9% Market risk premium5.9% Cost of Equity-12.15% Growth Rate-3.00% Number of Shares outstanding-$247.40 million Historical Perspective LBO Candidate Special Committe e Results: Intrinsic Value$116
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75 87663 20040504 233 0 0.00000 20040505 7521 75 86766 20010814 231 86763 0.00000 20010815 7540 75 Apple Dell Unlevering calculation Regression beta 1.06 1.16 D/E 0.00% 25.99% Unlevered beta 1.06 0.92 Relevering calculation Industry average unlevered beta 0.88 0.90 D/E 0.00% 25.99% Relevered beta
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000.00 | 8‚350.00 | 6‚700.00 | Pretax cost of debt | 5% | 5% | 5% | After-tax cost of debt | 3.3% | 3.3% | 3.3% | | | | | Market value weight of: | | | | Debt | 0.00 | 0.20 | 0.40 | Equity | 1.00 | 0.80 | 0.60 | Levered beta | 0.80 | 0.96 | 1.19 | Risk-free rate | 5% | 5% | 5% | Market premium | 6% | 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
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firm holds the more susceptible to systematic risk the firm will be. For example‚ higher fixed interest payments will be especially detrimental to the firm during market recessions. The beta on a levered firm reflects both business and financial risk. Thus‚ CAPM concludes that a stock’s risk premium is beta times the market risk premium. Adding the risk free rate will give us the cost of equity. The firm’s weighted average cost of capital is determined by taking the percentage of equity at market
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