debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash flows‚ but it does implicitly include the interest cost in the WACC. If he insists that the interest payments are explicitly shown‚ you should use the FTE method. 5. You can estimate the unlevered beta from a levered beta. The unlevered beta is the beta of the assets of the firm; as such‚ it is a measure
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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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important to note is that while the target structure is the capital structure that will optimize the company\’s stock price‚ it is also the capital structure that minimizes the company\’s weighted-average cost of capital (WACC). Calculating Weighted Average Cost of Capital A company’s weighted average cost of capital (WACC) is calculated as follows: Formula 11.8 WACC = (wd) [kd (1-t)] + (wps)(kps) + (wce)(kce) Where: Wd = weight percentage of debt in company’s capital structure Wps =
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return for a capital budgeting problem be project specific? Doesn’t the firm just have to satisfy an overall cost-of-capital requirement? Answer: The required rate of return for a capital budgeting problem is project specific because the firm is viewed as a portfolio of projects owned by the shareholders. It is the shareholder’s perspective that matters‚ and it is their opportunity cost that gives the required rate of return for a project. The question that the managers should ask is the following:
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Application of Capital Structure‚ Costs of Capital for Multiple Division firms Case Analysis: Pioneer Petroleum Corporation (PPC).1 Submitted by: Joseph Donato N. Pangilinan‚ FICD Date Presented: April 12‚ 2012 Introduction: This landmark case seeks to break the risk-reward trade off involved in calculating Capital Cost. The object of the solution must be to minimize project risks while maximizing project opportunities available. We want a rate and a rating system that does not unnecessarily
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chemicals‚ plastics‚ and real estate development concentrating in gas‚ oil‚ petrochemicals‚ and coal. In 1990‚ PP improved their coker and sulfur recovery facility to make their refining process more efficient and in turn has become one of the lowest cost refiners on the West Coast. Due to the refining process PP’s gasolines are among the most cleanest-burning in the industry. PP’s is also the producer of one-third of the world’s supply of methyl tertiary butyl ether (MTBE)‚ which is a chemical used
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technology to be brought into the commercial aerospace market at this time. Boeing has two models for the “Dreamliner‚” the 7E7 Baseline and the 7E7 Stretch‚ a slightly bigger version of the 7E7 Baseline. Both models are said to produce significant cost savings for companies by decreasing the jets fuel consumption by 20% and decreasing the operating expenses by 10%. Based on the seat configurations the Baseline model can seat between 200-300+ passengers and the Stretch can seat between 250-350+ passengers
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used to calculate the present value of future cash flows: the cost of equity (Ke)‚ the weighted-average cost of capital (WACC)‚ and the unlevered cost of capital (Ku). The Cost of Common Equity The cost of common equity is the building block for all of the other discount rates. The cost of common equity is based on the expectations that Starbucks’ investors have about the return they want for their common stock investment. The cost of common equity is used in the dividend discount model and the
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What are main elements in calculating the cost of capital? How does an increase in debt affect it? How do you identify an organization’s optimal cost of capital? • The main elements in calculating the cost of capital are cost of debt‚ cost of equity‚ preferred stock and common stock. • An increase in debt indicates a higher risk which can increase the required rate of return which raises the cost of capital. Higher debt can also accrue additional costs. • By mixing the permanent sources of funds
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Resources Midland Energy Resources is a fully integrated energy company with operations in E&P‚ Refining & Marketing (R&M) and Petrochemicals. Capital budgeting at Midland is done using discounted cash flow method and weighted average cost of capital (rwacc). Corporate Weighted Average Cost of Capital‚ rwacc The primary use of the corporate rwacc is valuation (TV=FCF/(rwacc-g)). While the rwacc may be used for evaluating internal projects‚ the usage will be incorrect owing to the fact that the risk-return
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