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%
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Royal Asset Package Valuation DCF Valuation EBITDA - Depreciation EBIT - Taxes on EBIT + Depreciation - Capex - WK FCF Wacc Enterprise Value + Terminal Value + working capital Total EV (31/12/1983) EV/EBITDA 1984 EV/EBITDA 1985 EV/EBITDA avg. Terminal Value Growth Capex = Depreciation Monticello Mill financials Revenues Annual Capacity Utilization rate Tons Price per ton EBITDA margin Box Plants financials Revenues EBTIDA margin Combined Package financials Revenues EBITDA margin Depreciation EBIT
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is accountable for‚ there is a possibility things could go wrong during this four- year period. Maple Energy and Tianjin Plastics are major equity investors‚ with 49 percent and 46 percent at stake they are responsible for repaying debt holders in case of failure or the lack of operating income to cover the debt repayments or principal. The Chinese Ministry of Power Industry (MOPI) is according to their share of five percent in this project also accountable‚ but the Chinese government refuses to
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the rate‚ but the firm is not factoring in riskiness of the segments individually. 2.) Telecommunications Service WACC = 27.1% * 3.44% +72.9% * 10.34% = 8.47% Rf = 4.62% (Exhibit 1) Average Beta = 1.04 (Exhibit 3) Weight of debt = 27.1% (Exhibit 3) Re = Cost of Equity = 4.62% + 1.04 * 5.5% = 10.34% After-tax cost of debt = 3.44% (Exhibit 1) Products & Systems WACC = 9.20% *4.48% + 90.80% * 12.10% = 11.4% Rf = 4.62% (Exhibit 1) Rm = 10.12% (Exhibit 1) Average Beta = (1.39 + 1.33)/2
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Calaveras Vineyards Case The appropriate TBV equations to calculate the firm’s WACC and FCF are: * R(after tax‚ wacc) = (E0/V0)rE + (D0/V0)rD (1-T) * FCF = TCF – corporate tax savings from deductable interest expense or * FCF = -NCPFA + Debt interest payment – corporate tax savings from deductible interest expense Below are the calculations for Calaveras Vineyards: * V1/1/1994 = (2‚500)/1.126 + 357‚000/1.126^2 + 463‚000/1.126^3 + 590‚000/1.126^4 + 780‚000/1.126^5
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CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores‚ Inc. 1. Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt‚ preferred stock‚ and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used
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The initial seeds for a merger between Suez and Lyonnaise were sown in spring 1995‚ however the CEOs of both companies‚ after doing an analysis of the potential synergies and strategic fit‚ decided to delay the merger and instead refocus on strengthening both companies’ complementary businesses. Even before the merger‚ Suez and Lyonnaise had a history of joint investments as well as strong ties between their senior managers. By 1997‚ Suez also owned 18% of Lyonnaise. At the time of the actual
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Sheet; h. Leveraging by borrowing to acquire more assets is one way to increase ROE. One benefit with leveraging is that‚ it reduces the corporate income tax liability of CPK‚ which had been almost $10 million in 2006. 2. Using the scenarios in case Exhibit 9‚ what role does leverage play in affecting the return on equity (ROE) for CPK? The operating leverage effect on ROE is percentage change of EBIT is more than percentage change in Sale. If percentage change of EBIT is more than the percentage
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Bibliography: * DePamphilis D. (2007)‚ ‘‘Mergers‚ Acquisitions‚ and Other Restructuring Activities: An Integrated Approach to Process‚ Tools‚ Cases‚ and Solutions’’‚ fourth edition‚ Elsevier/Academic Press: San Diego. * Damodaran A. (2005)‚ ‘‘The Value of Synergy’’‚ available at: http://pages.stern.nyu.edu/~adamodar/pdfiles/papers/synergy.pdf‚ accessed on April 02‚2011 * Giddy I * ‘‘Value/EBITDA
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Case Study #1: Green Valley Medical AEM 4570: Advanced Corporate Finance Name: Di Hu Net ID: dh583 1. What are the key elements of Green Valley’s strategy? a. What kind of hospital is it‚ and how does that relate to their overall strategy? Green Valley Medical Center is a nonprofit teaching hospital comprising of 330 beds affiliated with a large state university in a midsize town located several hours from the state’s two urban centers. It was the only regional hospital
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