recent studies on the combination of MM theory and CAPM model are based on the formula of cost of capital‚ which could get a beta equation of levered firm and unlevered firm. However‚ when we treat a company as an asset portfolio‚ the risk factor of the asset is the weighted average risk of equity and debt. From the definition of debt risk in MM theory‚ we also can get beta equation. It’s worthwhile to apply the combination of CAPM model and MM theory into the investment evaluations. Key words:
Premium Finance Risk Weighted average cost of capital
CAPM states that an investor’s expected rate of return equals the risk free rate plus the market risk premium weighted by beta. Managers are expected to make decisions that add to shareholder value. If the project does not provide a return greater than the investor’s expected rate of return‚ the project should not be undertaken. Additionally‚ when you use unlevered beta (asset beta) you reflect on the project risk not the company’s financing risk. 3. What is the risk-free rate that should be used
Premium Investment Rate of return
Graduate School of Business Administration University of Virginia UVA-F-1274 METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting. It provides a detailed description of the discounted cash flow (DCF) approach and reviews other methods of valuation‚ such as book value‚ liquidation value‚ replacement cost‚ market value‚ trading multiples of peer firms‚ and comparable transaction multiples. Discounted
Premium Discounted cash flow Cash flow
Introduction Timken Company was the leader in Bearings Industry‚ however lately the revenues had been declining owing to its cyclical nature and decreased demand for bearings. Timken was facing increased competition from Europe and Japan who were the leading manufacturers of ball bearings. To fight these imports Timken decided to pursue the strategy of bundling where in it could add additional products and services to its products and provide more value to its customers. Timken then started a companywide
Premium Free cash flow Credit rating Cash flow
RJR Nabisco Case Study 1. The RJR Nabisco Company passed trough some amazing facts of its financial life in the years of operating‚ starting as a tobacco company in 1875. In order to analyze RJR Nabisco company as a potentially candidate for leverage buyout (LBO) it is important to understand that all firms may be the targets of a leveraged buyout‚ but because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged
Premium Marketing Management United States
#1: $100 million in debt‚ $200 million in equity‚ current estimated equity beta of 3.0 Firm #2: $200 million in debt‚ $200 million in equity‚ current estimated equity beta of 3.0 Firm #3: $300 million in debt‚ $100 million in equity‚ current estimated equity beta of 4.0 There are no corporate or personal taxes (a) For each firm‚ calculate unlevered. (b) Using your answer in part (a)‚ what would you predict the equity beta to be for a firm in the restaurant industry with $300 million in debt and
Premium Corporate finance Stock Stock market
projected unlevered Free Cash Flow (FCF) with a Terminal Growth Rate (TGR) of 2.5% and WACC figures that ranged from 8.5% to 9% based on PSC’s leverage. Beta was calculated using the comparable companies Maruha Corp.‚ Nippon Suisan Kaisha Ltd. (NSK) and Pescanova SA. Maruha Corp. and NSK are integrated fishing‚ processing and packaging companies similar to PSC. Pescanova was used because like PSC 90% of its revenues are from frozen fish sales. Refer to Appendix A for calculations on PSCs beta and WACC
Premium Debt United States dollar
CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE (Difficulty: E = Easy‚ M = Medium‚ and T = Tough) Multiple Choice: Conceptual Easy: Business risk Answer: c Diff: E [i]. A decrease in the debt ratio will generally have no effect on . a. Financial risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will affect each type of risk above.) Business risk Answer: d Diff: E [ii]. Business risk
Premium Stock market Finance Stock
Corp. | Risk-Free Rate (Rf) | 8.72% | 8.72% | 8.72% | 8.72% | Market Risk Premium (MRP) | 7.43% | 7.43% | 7.43% | 7.43% | Target D/V | 74% | 40% | 42% | 60% | Current D/V | - | - | - | 41% | β leveraged | 0.92 | - | 1.04 | 0.97 | β unlevered (βu) | 0.53 | - | 0.90 | 0.70 | β relevered (βl) | 1.37 | 1.09 | 1.27 | 1.29 | Cost of equity (Re) | 18.90% | 17.05% | 18.15% | 18.30% | Cost of debt (Rd) | 9.03% | 9.39% | 9.16% | 9.43% | Effective tax rate (t) | 43.68% | 43.68% | 43.68%
Premium Weighted average cost of capital Debt
(around 25%) based on the assumptions we used‚ hereby we rate the investment risk at high level. Key assumptions used: - Long term investment for program life between 10 to 20 years; - Using market comparable companies’ data to calculate Ameritrade’s beta - Small listed company • Calculation of WACC 1. Source for the cash of the spending for the proposed projects. a. Increasing debt for the project financing. This will significant reduce the cost of capital but will increase risk of cash
Premium Rate of return Finance Security