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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appropriate unlevered beta for Collinsville at 1.09. As a result‚ Collinsville’s estimated relevered beta is 1.39. Re = 9.5% + (1.39 * 7.25%) = 19.57% Tax Rate: From the perspective of Dixon Corporation‚ the cost of capital evaluation would start out in
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Weighted Average Cost of Capital Introduction and objectives This paper aims at describing a way to compute the Weighted Average Cost of Capital (WACC). This method is often used by company management to determine the economic feasibility of different projects and thus to compute the NPV of a specific project by discounting cash-flows. The WACC determines the return that the company should generate to satisfy its debt-holders. For the company‚ it consists in a tool for projects decision-making
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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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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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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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What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 1.1 The definition of WACC Weighted average cost of capital(WACC)‚ is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could
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X. Weighted average cost of capital (WACC) The valuation of Abercrombie & Fitch Co. is based discounting future cash flows and economic profit‚ for that the weighted average cost of capital is needed. The WACC is the opportunity cost when investing in Abercrombie & Fitch Co. opposed to other investments with a similar risk. Investors want their return to excess the WACC before it can be considered a good investment; since people in general are risk averse‚ they want compensation for taking on risk
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Case Overview: Star River Electronics Ltd. Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based in Singapore. It was founded as a joint venture between an Asian venture capital firm‚ New Era Partners and Starlight Electronics Ltd‚ UK. It has enjoyed a great deal of success in the past‚ due in large part to their excellent reputation for producing high-quality discs. But due to recent emerge of Digital Video Disks (DVDs) Star River Electronics does need to face some
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