A. METHODOLOGIES: 1. The Weighted Average Cost of Capital (WACC) Approach: This method offers a wide range of advantages. For instance‚ the Capital Assets Pricing Model (CAPM) is employed in the calculation of the Cost of Equity. Thus‚ the discounted rate of 7.58 percent used in figure 1.12 Appendix is likely to be precise. The total value of the firm is $4.73 billion. Nonetheless‚ in view of the probabilities of forecasting errors in the estimation of cash flows‚ the degree of precision does
Premium Weighted average cost of capital Generally Accepted Accounting Principles Investment
inventory between AGI and Mercury‚ which the differing inventory management styles will most likely to weaken the acquisition. Although the manager of AGI believes that AGI’s inventory management system could be adopted by Mercury at little incremental cost. But other bidders can also easily solve the problem. In summary‚ the acquisition can make complementary advantages of both sides. Using the DCF model will show if it should be taken or not. 2. Analyse the projections formulated by Liedtke. Are they
Premium Discounted cash flow Weighted average cost of capital Free cash flow
QUESTIONS 1. Explain the importance of risk adjustment in the capital budgeting allocation process by answering the following questions. a. Explain why risk adjustments are important and how they can affect firm value. Without the correct risk adjustment the firms stock will lose value by taking on high risk projects. The firm could also be considered uncompetitive if they reject low cost/low risk projects. b. Explain how the single hurdle rate currently used by Northern Forest Products can change
Premium Weighted average cost of capital Risk Capital structure
Guillermo Furniture manufacturing‚ located in Senora‚ Mexico‚ has been a popular furniture manufacturing company in the area for years until the late 1990s when new competitors from overseas entered the market and an influx of people and jobs raised the cost of labor substantially. Although Guillermo was well established in his business and the work was reliable‚ he was unable to keep up with the competitors and their high-tech approach to furniture making. “Firms can overcome resource constraints and
Premium Financial statements Weighted average cost of capital Income statement
Chapter 14 The Cost of Capital 14-1. Templeton’s investment of $400M will be financed with $300M in debt and $100M in equity. Thus after the purchase‚ Templeton’s balance sheet (market value and book value‚ at t = 0) will look like this: ASSETS $400‚000‚000 DEBT $300‚000‚000 $400‚000‚000 EQUITY $100‚000‚000 $400‚000‚000 ) = 75% in debt financing‚ and ( $100‚000‚000 ) = 25% in equity Thus Templeton is using ( $300‚000‚000 $400‚000‚000 $400‚000‚000 financing. Its debt and equity weights are therefore
Premium Stock Bond Weighted average cost of capital
Can One Size Fit All? The Oceanic Corporation‚ a Chesapeake‚ VA based company‚ was established in 1994. Glenn Rodgers III founded the corporation‚ which was privately owned at the time‚ after his retirement from Norentech Corporation. The Oceanic Corporation was originally formed to provide ship repair services and quickly earned a Department of Defense (DOD) certified Alteration Boat Repair (ABR) designation. Among its specialties were structural welding‚ piping system installation and repairs
Premium Balance sheet Weighted average cost of capital Generally Accepted Accounting Principles
Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company‚ the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. Objectives: * Introduce the Modigliani-Miller intuition of capital structure irrelevance; * Establish how the cost of equity is affected by capital structure decisions
Premium Finance Weighted average cost of capital Capital structure
higher than the industry average this could mean that they are holding onto inventory too long. Their payables are higher than the industry average which suggests that they are carrying a high amount of debt. The receivables are also higher than the industry average which could mean the period between getting paid for their services and the time they provided them are too far apart or they are not getting paid at all. The operating costs are also high so Hatfield’s may
Premium Finance Balance sheet Dividend
we would like to figure out assumption 2 is correct or not‚ we should do the flowing data Analysis. If WACC < IRR‚ then we can launch this project. Of NPV is bigger than zero‚ we could launch this project as well. Analysis 1: WACC( Weighted average cost of capital) : E=10825 million‚ total value= 48978 million Re= Rf+β(Rm-Rf) Rf=3.52 Rm=10.23 β=1.16 (http://www.abg-analytics.com/stock-betas.shtml#.Uu65aLS2zDM) Re= 11.3 D=38153 tax rate = 34.00% Rd=6.6 WACC =11.84 Analysis 2:
Premium Boeing 787 Boeing Commercial Airplanes Weighted average cost of capital
6 Ratio Analysis 7 Profitability Ratios 7 Growth Ratios 7 Efficiency Ratios 7 Financial Strength Ratios 8 Dividend Ratios 8 Management Effectiveness Ratios 8 Discounted Cash Flow Valuation 9 Calculation of Weighted Average Cost of Capital 9 Cost of Equity Calculation 9 Pro Forma Financial Statements 10 Pro forma Profit and Loss Statement 10 Pro forma Balance Sheet 11 Proforma Cash Flow Statement 11 DCF using FCFF 11 Sensitivity Analysis 12 Results
Premium Free cash flow Discounted cash flow Cash flow