Policy 16 5.4 Analysis of Company’s Dividend Policy and Lintner’s Analysis 16 5.5 Optimal Dividend Policy 17 6 Valuation 19 6.1 Assumptions 19 6.2 Valuation Method 20 6.2.1 Determining the Cost of Equity (rS) 20 6.2.2 Determining the Cost of Debt (rb) 22 6.2.3 Weighted Average Cost of Capital (WACC) 22 6.2.4 Estimating the Future Sales Growth Rate 23 6.2.5 Estimating Future Cash Flows 23 6.2.6 Estimating Firm value 24 6.3 Sensitivity Analysis 25 6.3.1 Share price sensitivity
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techniques with considerations of other significant conditions such as project risk. However it can as well be seen that this strategy may conflict with the objective‚ as the company uses the hurdle rate to evaluate potential investments where the cost of equity is higher‚ then the WACC would appear higher as well(hurdle rate)and distract the company to invest in some
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WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond‚ the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market‚ a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in
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Problem: Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly‚ by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions
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which arises some issues: the fact that the book value is lower than the market value (the first formula) and provisions can be considered either as liabilities or assets (the second formula)‚ depending on firm. Then I will calculate the Weighted Average Cost of Capital. In 2004‚ the way of doing the balance sheets changed that’s why there are some differences between two reports. Part ------------------------------------------------------------------------------------------1 Measure of the
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calculate the weighted average cost of capital (WACC)?” you ask. “I do‚” she smiles. “We can determine the target WACC for Apix Printing Inc.‚ given these assumptions‚” she says as she hands you a piece of paper that says the following: •Weights of 40% debt and 60% common equity (no preferred equity) •A 35% tax rate •Cost of debt is 8% •Beta of the company is 1.5 •Risk-free rate is 2% •Return on the market is 11% “Great‚” you say. “Thanks.” “Be sure to indicate how these costs of capital
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leverage is linked with capital structure? Take example of a MNC and analyse. b. The following figures relate to two companies (10) P LTD. Q LTD. (In Rs. Lakhs) Sales 500 1‚000 Variable costs 200 300 ---- ------- Contribution 300 700 Fixed costs 150 400 ---- ------- 150. 300 Interest 50 100 ---- ------- Profit before Tax 100 200 ---- -------
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the Super Project. While we feel the incremental costs approach lacks a certain degree of sufficiency in taking into account all overhead‚ we believe the $453‚000 cost of using the existing Jell-O facilities would have already been accounted for on the Jell-O balance sheet and thus is a non-factor in determining the profitability of the Super Project. Simply adding the cost of erosion to Jell-O’s sales ought to be sufficient in rectifying the costs of switching the machine’s function. Before we could
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Brooklyn or develop the online grocery shopping. If running traditional grocery store‚ Crisp Markets has to rent and renovate a space in downtown Brooklyn. So the up-front renovation costs and rent should to be considered‚ which use the straight-line depreciation with a zero salvage value. Compared to this‚ the cost of branching out online grocery shopping includes up-front investments‚ additional investments and rent for warehouse. We think opening a traditional grocery store is better according
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Nike Inc.‚ Cost of Capital Dr. Romer Finance 3613 By: Joseph White Michael Parker NorthPoint a mutual-fund-management firm is contemplating adding Nike Inc. stocks to its Large-Cap Fund. Kimi Ford a portfolio manager for NorthPoint has developed a discounted-cash-flow forecast to help make the decision. Kimi comes to the conclusion that Nike is overvalued at its current price of $42.09 with a 12 percent cost of capital that she estimated. To determine if her estimation is correct about
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