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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it uses greater leverage. 2. No‚ it doesn’t follow. While it is true that the equity and debt costs are rising‚ the key thing to remember is that the cost of debt is still less than the cost of equity. Since we are using more and more debt‚ the WACC does not necessarily rise. 3. Because many relevant factors such as bankruptcy costs‚ tax asymmetries‚ and agency costs cannot easily be identified or quantified‚ it’s practically impossible to determine the precise debt-equity ratio that maximizes
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of debt = 4.5% + 3.57% = 8.07% Fourth add country specific risk: Since only Pakistan faces sovereign spread: Soevereign spread = 9.9% Pakistan: So the cost of equity = 7.2 + 9.9 = 17.1% Pakistan: Cost of debt = 8.07+9.9 = 17.97% WACC: Pakistan: WACC = E/V*cost of capital + D/V*cost of debt*(1-tax
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Nike’s management held a meeting to try and figure out a new strategy to rejuvenate the firm. The management had some new plans to address their financial woes. In Joanna’s memo to Kimi about Nike’s WACC‚ she calculated it to be 8.3%. She also provided some assumptions she made while developing this WACC. First‚ she noted that she decided to use a single cost of capital because she did not believe that other segments with Nike were large enough to make a considerable difference on the weights. She
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Assignment questions 1. 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? WACC means the weighted average cost of capital. WACC is based on the respective weights of the firm’s financing sources‚ equity and debt at the respective return rates. A firm’s capital comes from two main ways‚ equity and debt‚ and WACC takes both into consideration. This means WACC includes all stock‚ bonds‚ long-term
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What is the weighted average cost of capital (WACC) for Marriott Corporation? WACC = (1 - τ)rD(D/V) + rE(E/V) D = market value of debt E = market value of equity V = value of the firm = D + E rD = pretax cost of debt rE = after tax cost of debt τ = tax rate = 175.9/398.9 = 44% Cost of Equity Target debt ratio is 60%; actual is 41% [Exhibit 1] βs = 1.11 βu = βs / (1 + (1 – τ) D/E) = 1.11/(1 + (1 – .44) (.41)) = 0.80 Using the target debt ratio of 60%: βTs = βu (1 + (1 – τ) D/E)
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Overview This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written‚ closed-end surveys sent
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short-term bank debt in order to increase the current ratio. e. Reduce the percentage of debt in the target capital structure. 7. LaPango Inc. estimates that its average-risk projects have a WACC of 10%‚ its below-average risk projects have a WACC of 8%‚ and its above-average risk projects have a WACC of 12%. Which of the following
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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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