the WACC (Weighted Average Cost of Capital) of Bickely with its 30/70 capital structure? Bickley’s average borrowing rate with this capital structure is 7.5%. WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity Using CAPM Cost of equity = Rf + (Rm-Rf) beta = 3.5% + 7.5% X 1.3 = 13.25% WACC = 0.3 X 7.5% X (1-0.4) + 0.7 X 13.25% = 10.625% What will be Bickley’s WACC with its 15/85 capital structure? Cost of equity = 3.5% + 7.5% X 1.14 = 12.05% WACC = 0
Premium Weighted average cost of capital Finance
Chapter 8 The Cost of Capital 236 CHAPTER 8—THE COST OF CAPITAL TRUE/FALSE 1. Capital refers to items on the right-hand side of a firm’s balance sheet. 2. The component costs of capital are market-determined variables in as much as they are based on investors’ required returns. 3. The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. 4. The cost of issuing preferred stock by a corporation must be adjusted to an after-tax
Premium Dividend yield Net present value Weighted average cost of capital
80 common and uncommon errors in company valuation 80 common and uncommon errors in company valuation Pablo Fernández PricewaterhouseCoopers Professor of Corporate Finance IESE Business School. University of Navarra. Camino del Cerro del Aguila 3. 28023 Madrid‚ Spain. Telephone 34-91-357 08 09. Fax 34-91-357 29 13. e-mail: fernandezpa@iese.edu ABSTRACT This paper contains a collection and classification of 80 errors seen in company valuations performed by financial analysts‚ investment banks
Premium Net present value Discounted cash flow Fundamental analysis
equity Pretax cost of debt After Tax cost of debt rd Market value weights of: Wd Debt We Equity bL Levered beta Rf Risk-free Rate Market Premium RM Ke Cost of equity WACC EBIT - Taxes (34%) EBIAT + Depreciation - Capital expense Change in Net Working Capital Free Cash Flow Value of Assets ( FCF/WACC) CASE # 31 0% Debt 100% Equity $ $ 20‚000 $ $ 20‚000 7.0% 4.62% $ 34% $ $ $ $ $ $ 0 1 0.8 7% 8.6% 13.88% 13.88% 4‚206.00 1‚430.04 2‚775.96 1‚000
Premium Generally Accepted Accounting Principles Corporate finance Finance
risk‚ therefore‚ the cost of capital has to be a pertinent return for that particular division. 2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations. Is Midland’s choice of EMRP appropriate? If not‚ what recommendations would you make and why? The appropriate EMRP to use in the 2007 WACC calculation is 6.0% as listed in Table 2. Team 1 compared this rate to real-world data using the average annual total return on common
Premium Weighted average cost of capital Investment Finance
Midland’s cost of capital 1. I choose the rate of 30-year U.S. Treasury bonds in 2007 (4.98%) as the risk free rate in the 2007 WACC calculations. The reason is that majority of large firms and financial analysts report using long-term yields for bonds to determine the risk-free rate. Rf=0.0498 2. Cost of debt‚ which is determined by adding the spread to Treasury (1.62%) to the rate of 30-year treasury bonds in 2007. Rd=0.0498+0.0162=0.066 3. Cost of equity‚ the EMRP (5%) and D/E (59
Premium Weighted average cost of capital Capital Taxation in the United States
Top of Form Grading Summary These are the automatically computed results of your exam. Grades for essay questions‚ and comments from your instructor‚ are in the "Details" section below. Date Taken: 10/13/2013 Time Spent: 2 h ‚ 49 min ‚ 52 secs Points Received: 52 / 100 (52%) Question Type: # Of Questions: # Correct: Multiple Choice 9 5 Essay 1 N/A Grade Details - All Questions 1. Question : (TCO D) A stock just paid a dividend of D0 = $1.50. The required rate
Premium Net present value Cash flow Dividend yield
FIN 534 Discussion Questions Week 1-11 Solution Follow www.hwmojo.com link below to purchase solution http://www.hwmojo.com/products/fin-534-discussion-questions We have all assignments‚ homework problems set and exams for FIN 534. Email us support@hwmojo.com FIN 534 Week 1-11 Discussion Questions Solved Week 1 DQ 1 Discussion 1: An Overview of Financial Management. A. In your judgment‚ what were the principal causes of the recent financial crisis and Great Recession? Would you include Government
Premium Cash flow Corporate finance Net present value
Marriott cost of capital Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott’s use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd)‚ the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case. Cost
Premium Mathematics Capital Weighted average cost of capital
price we have applied the Weighted Average Cost of Capital Method of Valuation. The WACC method implies that the firm’s weighted average cost of capital represents the average return that the company must pay to its investors‚ both debt and equity holders‚ on after tax basis. We assume that the company maintains constant Debt/Equity ratio and the WACC remains constant all the time. We first calculate the WACC by the formula: [pic] Where‚ re = rf + β(rm – rf) = 6.71% + 0.73 x 6% = 11.09%
Premium Stock market Weighted average cost of capital Generally Accepted Accounting Principles