Capital (WACC). Write down the WACC formula‚ and discuss its components. WACC (Weighted Average Cost of Capital) is a market weighted average‚ at target leverage‚ of the cost of after tax debt and equity. It is a critical input for evaluating investment decision‚ and typically the discount rate for NPV calculation. And it serves as the benchmark for operating performance‚ relative to the opportunity cost of capital employed to create value. Algebraically‚ it is given by WACC = [E/(E
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Case Two Analysis Dixon Corporation: The Collinsville Plant Paul Candland & Lynn Chang October 1‚2013 WACC Calculation In order to calculate WACC‚ we need to first start with the beta of equity. We are given the beta of equity of 1.06 of Dixon as a firm in Exhibit 7. However‚ the beta given is not an appropriate measure of the systematic risk of the Collinsville Plant‚ because Dixon produces many other chemical products other than Sodium Chlorate. Therefore‚ in order to accurately capture
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NIKE CASE STUDY 1. Why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers? Weighted average cost of capital or WACC represents the overall cost of capital in the company. It takes into considerations cost of debt and cost of equity. As company’s value can grow by increasing its assets that could be financed either be debt or equity and cost of capital shows how much it costs to do that. Cost of capital is a very important component
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MBA 579 Homework Assignment 4-2 True/False Indicate whether the statement is true or false. ____ 1. The tighter the probability distribution of its expected future returns‚ the greater the risk of a given investment as measured by its standard deviation. ____ 2. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly. ____ 3. An individual stock’s diversifiable risk‚ which
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Question1. NPV = FCF1/(1+WACC)+FCF2/(1+WACC)^2+FCF3/(1+WACC)^3+FCF4/(1+WACC)^4+FCF5/(1+WACC)^5 +FCFp‚ where FCF1…FCF5 are the free cash flows in years from 1999 to 2003. FCF = Cash flow from Operations – increase in net working capital requirement – capital expenditures‚ discounted by WACC. For example‚ in 1999 FCF1 = (7965 – 516 – 4938)/(1+0‚1) = 2283. Similarly‚ we calculate FCF2=2479‚ FCF3=2666‚ FCF4=3007‚ FCF5=3132. As we assume‚ that after 2003 the FCF will grow permanently by 4% by year
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Chapter 6: Discussion Question #4 (p. 223) 4. Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures? Typically‚ it is easier to forecast a seasoned firm’s sales to that of an early-stage venture because the seasoned firm will have an operational history. Basing current sales on historical data is easier to do than trying to estimate sales based on little to no historical data to benchmark from. If you are a start-up / early-stage venture and
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flows of the firm. The discount factor can be calculated with the WACC formula. (The calculation of the WACC formula is done in question 3) In this case we would choose a time horizon from 10 years‚ regarding to the data quality and the uncertainty of the evolution of Midland Energy Resources future cash flows. In addition the time horizon of the cash flow estimation should be equal to the used maturity of the risk free rate in the WACC calculation. Midland Energy Resources will repurchase shares
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capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? (Points : 10) Long-term debt Accounts payable Retained earnings Common stock Preferred stock 5. (TCO E) Duval Inc. uses only equity capital‚ and it has two equally-sized divisions. Division A’s cost of capital is 10.0%‚ Division B’s cost is 14.0%‚ and the corporate (composite) WACC is 12.0%. All of Division A’s projects are equally risky‚ as are all of
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What type of investments would you value using Marriott’s WACC? The weighted average cost of capital measures the average risk inherent in the corporation and overall capital structure of the entire firm. Noting that low asset betas for less cyclical industries such as utilities and household products‚ versus the much higher asset betas of high-tech firms and luxury retailers‚ we can’t deal with the varied businesses in the same way when doing the valuation since that different lines of businesses
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model (CAPM) along with the WACC when estimating the cost of equity. Both of the methods‚ along with firm-to-firm discrepancies‚ will be described below. Weighted-Average Cost of Capital With the WACC‚ corporations develop a standard to use against capital market alternatives. Moreover‚ since capital is an opportunity cost for investors‚ if a firm does not earn more than its cost-of-capital‚ it does not make money for the investors. The three variables used in a WACC model are “K” representing
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