as the discount rate in net present value (NPV) project appraisal techniques.1 The weighted-average cost of capital (WACC) represents the overall cost of capital for a company‚ including the costs of equity and cost of debt‚ weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money. The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: Where: Re
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Bus M 401 Dixon Case Estimate of WACC for Collinsville Plant The WACC for Collinsville‚ according to our estimations‚ came up to about 16.22% (Exhibit I). We took the average of the unlevered betas of comparable companies‚ 0.91‚ and relevered it according to Dixon’s target capital structure. Dixon’s 5-year historical debt ratio was 27.5%‚ but this approach would not be reliable due to its steep downturn debt ratio from 51% in 1975 to 6% in 1979. Thus‚ we thought that the best estimate of the
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the firm’s debt V = E + D Tc = corporate tax rate D/V and E/V Ratio: Since the target debt ratio of Dixon is given to be about 35%‚ we assume the target D/V ratio for Colinsville investment to be the same. Hence the E/V ratio = 1 ’ D/V = 65%. Given the fact that Dixon and Collinsville are both specialty chemicals producing operations‚ the target leverage ratio of 35% for Dixon is reasonably assumed to apply to Collinsville. Cost of Debt: Cost of debt for Collinsville is estimated
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1. Why do think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain. (10% weighting) Answer The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold‚2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same risk
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weighted average cost of capital (WACC) to be 8.3%. I find error in this calculation as a result of the following points of disagreement: a) Weighting of Capital Structure: Use of book values of capital rather than the market values b) Cost of Debt Calculation: Incorrect method for calculating debt c) Tax Rate: Use of a tax rate derived from the summation of state and statutory taxes instead of the firm’s marginal tax rate 2. Revised Calculation of WACC: WACC reflects the weighted average
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religion named The Gloryers‚ which means Jeane Dixon‚ will help us to survive when the Armageddon comes and brings the glory to all our practitioners. Background of The Gloryers Jeane Dixon who was a famous American astrologer of the 20th century has accurately predicted the futures (Dixon‚ & Noorbergen‚ 1971). She prophesied that the Armageddon will come within 100 years‚ and her prediction is based on what Jesus told her in her dreams. Jesus told Jeane Dixon that only kindness people could survive after
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1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash flows. You should estimate and present each component of the WACC separately‚ explaining briefly but clearly what assumptions you are making for each of them. In the same spirit‚ estimate the appropriate all-equity cost of capital for the APV-based valuation. WACC calculation. WACC = RD*(1-t)*D/(D+E)+RE* E/(D+E) Cost of equity We assume that risk free rate (Rf) equals rate of long-term Treasury
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WACC Example: A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also‚ the firm: - has 1‚000‚000 common shares outstanding - current price $11.25 per share - next year’s dividend expected to be $1 per share - firm estimates dividends will
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The Cost of Capital Project: Internet Version {December 2009} By Wm R McDaniel‚ PhD Objective The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting datum to estimate the discount rate to use in the net present value analysis of new projects or of termination decisions. The student will later need to know the technique for application in some case
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Approach is to analyze financial maneuvers separately and then add their value to that of the business. | APV always works when WACC does‚ and sometimes when WACC doesn’t‚ because it requires fewer restrictive assumptions | Some limitations amount to technicalities‚ which are much more interesting to academics than to managers. | | Less Prone to serious errors than WACC. | Income from stocks- as opposed to bonds- may be taxed differently when the investor files a personal tax return : this usually
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