projects across all divisions • Midland generally used traditional discounted cash flow methods to evaluate potential projects and investments. Some overseas projects were analyzed as streams of future equity cash flows‚ and were discounted based on cost of equity as a result. Once funded‚ a project/investment’s performance was measure in two ways. The first being actual performance vs forecasted plan over 1‚ 3‚ and 5 year periods‚ and the second being Economic Value Added (EVA). EVA was calculated
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paid a dividend. Its current free cash flow of $400‚000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value o $6‚000‚000 (400000*1.05)/(.12-.05) (13-3) Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012‚ and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012? Actual Projected 2010 2011
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The cost of company’s capital can be define of as the minimum return required by providers of finance for investing in an asset‚ whether that is a project‚ a business unit or an entire company. It is important to reflect the capital structure used to finance the investment. To create a capital companies usually use a funds providing by creditors and shareholders. Managers use cost of capital as the discount rate in net present value (NPV) project appraisal techniques.1 The weighted-average cost
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According to the trade-off theory‚ the optimal capital structure does exist (Kraus and Litzenberger‚ 1973). The higher level of debt may increase both bankruptcy and financial cost that lead the firm to go or avoid bankruptcy. However‚ there are several advantages of raising debt capital. Firstly‚ tax-deductions which decrease the cost of debt. Secondly‚ stockholders do not have to share the profit when the firm has excess‚ as debt holders are limited to their fixed return. Finally‚ stockholders do have
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analysis of Wal-Mart‚ Inc is its current and future financial condition. The most imperative areas that are found in the Capital Structure Analysis Report fall into the following categories: Working Capital Management‚ Valuation and Investment‚ and Cost of Capital. The company¡¦s operational processes within each area can be examined and related financial data reviewed. Once the financial data is collected and calculated potential areas for improvements can be identified and corrective or innovative
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15/0.85 = 1.14 What is the WACC (Weighted Average Cost of Capital) of Bickely with its 30/70 capital structure? Bickley’s average borrowing rate with this capital structure is 7.5%. WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity Using CAPM Cost of equity = Rf + (Rm-Rf) beta = 3.5% + 7.5% X 1.3 = 13.25% WACC = 0.3 X 7.5% X (1-0.4) + 0.7 X 13.25% = 10.625% What will be Bickley’s WACC with its 15/85 capital structure? Cost of equity = 3.5% + 7.5% X 1.14
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Income Statement Allen Products‚ Inc. for the Year Ended December 31‚ 2010 | Pessimistic | Most Likely | Optimistic | Sales | $900‚000 | $1‚125‚000 | $1‚280‚000 | Less cost of goods sold (45%) | 405‚000 | 506‚250 | 576‚000 | Gross profits | $495‚000 | $ 618‚750 | $ 704‚000 | Less operating expense (25%) | 225‚000 | 281‚250 | 320‚000 | Operating profits | $270‚000 | $ 337‚500 | $ 384‚000 | Less
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Perpetuity | Rs 15.8% | $1‚528‚485 | Weighted Average Cost of Capital Approach | Debt/Market Value of .25 | RWACC 15.1% | $1‚469‚972 | | 2002E | 2003E | 2004E | 2005E | 2006E | Free Cash Flows ($ Thousands) | (112) | 6 | 151 | 314 | 495 | Conclusions and Recommendations If Sampa Video chooses the all equity financing option‚ the firm will receive the lowest net profit from the project. The unlevered cost of equity is significantly higher than the cost of debt in this scenario. Furthermore
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based upon the underlying economics? Underlying economics: -(Demand of shrimp uncertain) As we know U.S. economy was on recession on this years‚ In 1975 the tax rate was the highest since 1947; the unemployment rate was extremely high (6%). The average of the Treasury Bills from 1970-1980 was 7.08%. Despite the economic conditions‚ analyzing the Income statement and Balance sheet with an inflation of 11%; I think that the purchase of a new plant is a good long term investment which will start
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government bond‚ which is 6%. 2. HydroTech’s: a. Market Capitalization (its market value of equity)‚ $100 million. b. CAPM beta‚ 1.2 c. Total book value of debt outstanding‚ $50 million. d. Cash‚ $10 million 3. The cost of debt (using the quoted yields on HydroTech’s outstanding bond issues)‚ which is 7%. With this information in hand‚ you are now prepared to undertake the analysis. Case Questions & Solutions for Case Questions 1 – 5 1. Calculate HydroTech’s
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