−investment + CFN CF1 CF2 + +L+ 2 (1 + WACC) (1 + WACC) (1 + WACC) N where‚ in a simple situation: equity debt WACC = equity + debt (cos t of equity ) + equity + debt (cos t of debt )(1 − tax rate ) Using debt for financing has a tax advantage in that interest payments are tax deductible. This tax deductibility is a source of value for the firm. In the normal NPV calculation‚ this additional value is accounted for in the WACC. However‚ in many cases the capital structure
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should undervalued at discount rates below 11.2% * The market responded mixed signals to Nike’s changes. Kimi Ford has done cash flow estimation‚ and asks her assistant‚ Joanna Cohen to estimate cost of capital. WACC Methodology: * The weighted average cost of capital (WACC) is the rate (expressed as a percentage‚ like interest) that accompany is expected to pay to debt holders (cost of debt) and shareholders (cost of equity) to finance its assets. * It is the minimum return that a
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to assess its two business segments. They look at return of capital on both segments and apply the same hurdle rate‚ which is also used for performance assessment. The hurdle rate was established using Teletech’s Weighted Average Cost of Capital (“WACC”) as a representation of the opportunity cost of money. Some of the company’s senior management‚ chiefly Rick Phillips‚ Executive Vice President of the Telecommunications Services segment‚ believe the company should be using different hurdle rates
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General Approach The company is split into 3 divisions Lodging‚ Contract Services and Restaurants. The WACC for each of the 3 divisions and then subsequently the entire corporation’s WACC need to be calculated. This will be done through calculating the WACC for each of the 3 divisions and then taking a weighted average of these 3 divisional WACC numbers to get the overall Marriott Corporation WACC. 1. Calculating the Beta a. Calculate the levered Beta for each division: BL = BU (1+D/E)
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repurchase its stock as the company believed that repurchases of shares were a better use of Marriott’s cash flow and debt capacity than acquisitions or owning real estate. Computing Marriott’s WACC The cost-of-capital was computed both divisionally and overall for the company. It required using the formula WACC = (1-t_)RD(D/V) + RE(E/V). _D and E are the market values of the debt and equity respectively and V (market value) = D+E. RD and RE are the pretax cost of debt and cost of equity respectively
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Political Risk: 2. If Venerus implements the suggested methodology‚ what would be the range of discount rates that AES would use around the world? If Venerus and AES implement the suggested methodology‚ the projects would change while WACC changes. To find WACC we must first calculate the leveraged bets for each the US Red Oak and Lal Plr Pakistan projects‚ using the equation unleveled beta/(1-D/V). It is easy to find debt to capital ratios‚ which are 39.5% for U.S and 35.1% for Pakistan‚ and the
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highest NPV and here in our case we will choose project S since it has a greater NPV compared to project S (19.98>18.79). If the projects are independent we will choose both. C - 3 The NPV will change if the WACC change; if the WACC increases the NPV will decrease on the other hand if the WACC decreases the NPV will increase. D – 1 Internal rate of return (IRR) is the discount rate that forces PV inflows equal to cost‚ and the NPV = 0. IRR using excel for project L: IRR 18.13% For project
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equipment also has an IRR above the 15% WACC and a positive NPV. However‚ the used equipment option would provide greater returns‚ than the new equipment will. 6. Stewart is concerned that the projected annual sales growth rate of 15% for incremental blended material may be optimistic. Recalculate the Cash Payback Period‚ Discounted Cash Payback Period‚ NPV‚ IRR and MIRR for each alternative assuming the annual sales growth rates of 10% and 5%. Assume a WACC of 15%. Does the change in growth rate
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value (NPV) analysis‚ or in assessing the value of an asset. WACC (weighted average cost of capital) is the proportional average of each category of capital inside a firm (common shares‚ preferred shares‚ bonds and any other long-term debt). WACC is also called required return. The term required return tends to reflect an investor’s point of view‚ while cost of capital is the same return only from the firm’s point of view. WACC is the rate of return required by the capital provider in exchange
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explain capital structure and determine weighted average cost of capital (WACC) from the assumption provided by Mary Francis. Furthermore‚ we will show how WACC and Capital Structure can be leveraged to find out the viability of the capital project. Additionally‚ we will explain marginal cost of capital. To close‚ we will make a recommendation on the best approach to apply to project evaluation between capital structure and WACC Capital Structure Capital Structure refers to the sources of funding/financing
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