capitalization (small market value) companies have earned greater historical rates of return than investments in large capitalization companies over the long-term. • Empirical evidence suggests that CAPM (beta - adjusted return) tends to underestimate historical rates of return on small companies (i.e.‚ beta -adjusted return too low) • SBBI Yearbook has documented this effect: – Size-based (where size is measured by market value) premiums over return predicted using textbook CAPM – Based on 10 size
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Globalizing the Cost of Capital and Capital Budgeting at AES (Case Analysis) AES Corporation AES was founded by Roger Stan and Dennis Bakke in 1981 after the Public Utility Regulation Policy Act (PURPA)‚ which created a market for independent power producer. In 1980s‚ the company experienced rapid growth in United States and went into public in 1991. From early 1990s‚ AES began to explore offshore markets and made remarkable success. In the 12 years since it went public‚ AES has hold more
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Simplified Valuation Analysis for the Airbus A3XX Key Assumptions as of 2008 Price per Plane Number of Planes Operating Margin $225 40 17.5% Discount Rate Assumptions (a) Risk-free Rate 6.0% 10-year US Treasury yield (p. 8) Asset Beta 0.84 Risk Premium 6.0% Discount Rate 11.0% in millions General Assumptions as of 2000 Inflation Rate 2.0% Tax Rate 38.0% Results from the Model NPV = After-tax IRR = Pre-tax IRR = # planes sold by 2019 Capacity Constraint Violated? Required Investment as of 2000
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Question No. 1 You have been hired as an international investment banker by a large U.S. institutional investor who is considering purchasing HPI stock. Provide an analysis of i) China as an investment destination‚ ii) key success factors‚ and iii) HPI’s strengths and weaknesses. China‚ officially the People’s Republic of China is the world’s largest country by population and one of the largest by area‚ measuring about the same size as the United States. The country’s varied terrain includes vast
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Marriott Corporation: Case Introduction Marriott is renowned for its elegant and comfortable hotels and resorts. The company caters to a targeted customer base‚ ranging from the frequent corporate business traveler to the family enjoying their occasional weekend get-away. Marriott has continued its rise in the lodging‚ contract services‚ and restaurant industries. The company continuously strives to meet the needs and wants of its customers while strategically maneuvering the rigors of today’s competitive
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deductibility of interest expense is called the: a. interest tax shield. b. depreciable basis. c. financing umbrella. d. current yield. e. tax-loss carryforward savings. Difficulty level: Easy 15-2 UNLEVERED COST OF CAPITAL b 5. The unlevered cost of capital is: a. the cost of capital for a firm with no equity in its capital structure. b. the cost of capital for a firm with no debt in its capital structure. c. the interest tax shield times pretax net
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Case Solutions Corporate Finance Ross‚ Westerfield‚ and Jaffe 9th edition CHAPTER 2 CASH FLOWS AT WARF COMPUTERS The operating cash flow for the company is: (NOTE: All numbers are in thousands of dollars) OCF = EBIT + Depreciation – Current taxes OCF = $1‚332 + 159 – 386 OCF = $1‚105 To calculate the cash flow from assets‚ we need to find the capital spending and change in net working capital. The capital spending for the year was: | |Capital spending
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firm chooses to finance with equity alone‚ the equity is considered unlevered equity. Unlevered equity is the equity of a firm with no debt. If a firm has no liabilities‚ the equity holders will receive all of the cash flows generated by the project on day one. When there is no debt‚ the cash flows of the unlevered equity are equal to those of the project stating on day one. Because the risk of the project equals the unlevered equity‚ shareholders will earn an appropriated return for the risk
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Income – After Tax Operating Income Unlevered Cash Flow (UCF) After Tax Operating Income + Depreciation – Capital Expenditures – Change in Working Capital + Proceeds from Asset Sale Interest Tax Shields Interest Expense * Tax Rate Present Value of Unlevered Cash Flows (1989-1993) UCF / (1+ Interest Rate)^ (Year from 1989+1) Total Present Value of Unlevered Cash Flows (1989-1993) Add up each Years Present Value from 1989-1993 Value at t=5 of Unlevered Cash Flows After 1993 ((UCF At 1993)(1+Growth
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UVA-F-1606TN Rev. Sept. 1‚ 2011 CARDED GRAPHICS‚ LLC: SHEETER REPLACEMENT DECISION Teaching Note Synopsis and Objectives The owner of a midsize folding carton printer is considering the replacement of an old machine for cutting sheets of paper from rolls (a sheeter) with a new one. This standard capital budgeting analysis‚ which requires identification of both the relevant cash flows and the relevant discount rate‚ is enhanced by an alternative that is not explicitly stated but can be readily
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