Executive summary 2 PART 1: Valuation of the Yell Group 3 LBO Potential 3 Financial structure 3 Ownership structure 4 Potential cultural differences 4 Valuation 4 PART 2 : Readings 10 Bond prices and takeovers 10 Abnormal Bond Returns 10 Impact on bond returns of different legal standards in case of cross-border acquisitions 11 Sources of financing takeovers 11 References 14 Executive summary The Yell group is consists of BT Yellow Book Yellow Pages USA and
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hearing aid. They have to determine the costs and benefits of different financing alternatives and‚ finally‚ select the optimal financing package in terms of expense‚ expected return to investment and financial flexibility. Analytical approach Unlevered free cash flows to the firm ROI analysis NPV analysis Findings 1. The strengths and draws of debt financing Burns and Irvine can maintain 100% ownership of this company using debt financing. Their obligations are payment of principal and
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MODULE 5: CAPITAL STRUCTURE & COST OF CAPITAL After studying this module‚ you should be able to: 1. Define the overall cost of capital 2. Calculate the cost of individual components of a firms’ overall cost of capital‚ cost of debt‚ cost of preferred stock and cost of equity 3. Calculate the firm WACC 4. Be able to define the term capital structure. 5. Explain the traditional approach to capital structure and the valuation of a firm. 6. Discuss the relationship between leverage and the cost of capital
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2004E | 2005E | 2006E | Free Cash Flows ($ Thousands) | (112) | 6 | 151 | 314 | 495 | Conclusions and Recommendations If Sampa Video chooses the all equity financing option‚ the firm will receive the lowest net profit from the project. The unlevered cost of equity is significantly higher than the cost of debt in this scenario. Furthermore‚ an entirely equity-based approach denies the firm the tax benefits of a more balanced capital structure. Additionally‚ the flow to equity approach is best
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500 and βBoeing is analyzed for both short term (60 days) and long term impact (58 months) of gulf war. As the gulf war was projected not to extend beyond 6 months‚ it made sense to evaluate the WACC for both the time horizons. Average of unlevered βs of Grumman‚ Northrop and Lockheed corporations‚ with higher percentages of revenues from defense‚ helps in calculating the βdefense for Boeing. This in turn gives the βcommercial for both short and long term periods using the following
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1. ABC Corp. is considering expansion of its production capacity by investing in a project with the following unlevered cash flows (UCF): Year 0: -$20 million Year 1: +$5 million Year 2: +$8 million Year 3 and all future years: +$10 million ABC Corp. will finance this expansion both with internal cash and by selling $10 million in bonds. The bonds pay interest of 10%. The expected return on ABC’s stock is 20% and firm is expected to maintain a debt-equity ratio of 1 for the foreseeable future
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higher variability would indicate higher systematic risk and vice versa. The systematic risk of a security is measured by a statistical measure called Beta. But dealing with the beta‚ there is a problem of reliability. That is‚ to what extent the calculated value of beta is reliable. This study deals with the beta estimation practice followed by Indian stock markets‚ with special
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Question 1: Does Borrowing Create Value? If so‚ for whom? If not‚ then why do so many executives concern themselves with leverage? It depends; Borrowing creates value if the company borrows at the optimal amount of debt or less. If the company borrows more than the optimal amount of debt‚ then borrowing will destroy value. Borrowing will increase value of the firm through the tax shield that borrowing brings. Thus‚ the increase value of the firm will increase the value of equity and create
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1. You operate a firm which will last one year. At the end of the year‚ the firm will generate its single cash flow. It will either be 140 or 40 – each equally likely. (Assume all cash flows are in $million.) You also have debt outstanding with face value of 100. You are the sole equity holder. A new project is now available to you but it requires an investment of 30‚ of which you have none. If you can obtain financing for the project and undertake it‚ the project will generate 50 next year
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but that means they can be evaluated lower by Heritage partners. 3. What is the fair market value of the firm considering the Heritage proposal? Use DCF analysis—specifically‚ the adjusted present value method. Discount cash flows at the firm’s unlevered cost of equity (calculate cost of equity using the comparable public firms provided)‚ and discount interest tax shields
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