Part I – Perfect capital markets‚ capital structure and cost of capital (15 points) GP Corp. has common stock with a market value of $200 million and riskless debt with a value of $100 million. Investors expect a 15% return on the stock and a 6% return on the debt. Assume perfect capital markets without any taxes. a) Suppose GP issues $100 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? (4 points) b) Suppose instead GP issues $50 million
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| American Home Products Corporation | Case Study | | Table of Contents Introduction 3 Background 3 Culture of the Business 3 Stages of Development 3 Core problem 4 analysis and options 4 Risk analysis 5 First: The Business Risk 5 Second: The Financial Risk 6 Other kinds of risk: 7 Financial Analysis 7 The WAAC 7 Ratio Analysis 11 Recommendations: 12 References: 12 Introduction Background In 1981‚ AHP had reached sales of more than $4 billion by producing
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Nike Inc. Case 1. What is the WACC and why is it important to estimate a firm’s cost of capital? WACC is weighted average cost of capital‚ which is the expected rate of return on average from all the company’s existing debts and securities. It takes into account all different types of financing in the company’s capital structure. The reason it is important to estimate WACC is because it measures what it costs the firm to take on a project based on its current Debt and Equity mix. When the firm
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Week One Discussion Questions • What is the capital market? How is the primary market different from the secondary market? In your opinion‚ are these markets efficient? Why? • What are three primary roles of the U.S. Securities and Exchange Commission (SEC)? How does the Sarbanes-Oxley Act of 2002 augment the SEC’s role in managing financial governance? Do you think businesses became more ethical after Sarbanes-Oxley was passed? Provide examples to support your answer. • What ratios measure
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350 108‚150 192‚500 Payback Period Discounted Payback Period Average Return on Investment NPV PI IRR Equivalent Annuity 2.46 yrs 3.01 yrs 39% 165‚017 baht 1.21 21% 52‚906 baht Working Notes 1. Rental income = baht 170‚000*12 for the years 1 and 2 and increase by 5% in the years 3 and 4 2. Straight line depreciation 3. Patronage factor taken as 0.5 i.e. 12.5% reduction in net room revenue 4. Taxes at 30% 5. Base capital cost = baht 770‚000 6. WACC = 10.75% Yr. 3 Yr. 4 2‚142‚000
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bonds yielding 8%. The remaining long term debt will be at 7%. The marginal tax rate will remain the same. What will be Bickley’s new Beta with this new 15/85 capital structure? 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%. What will be Bickley’s WACC with its 15/85 capital structure? PROBLEM BASED ON CHAPTER 26 – MODIGLIANI & MILLER EXTENSION MODELS WITH GROWTH ASSUMPTIONS
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Analysis Guillermo Navallez owns a furniture store in Sonoma‚ Mexico near his residence. He produces tables and chairs from the available timber supply in the area. Until the late 1990s‚ Guillermo was enjoying a lucrative business because labor costs were low‚ and he could charge a premium price for his handcrafted and high quality products (University of Phoenix‚ 2010). Guillermo is noticing a decrease in his profit margins because of a change in the furniture market environment. A competitor
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of enriched Uranium to nuclear power plants. Due to the expiration of long term energy cost savings contracts‚ USEC is examining the possibility of taking on a new project called the American Centrifuge Project. This project will utilize a different process for Uranium enrichment‚ which is the core business process of USEC. The new technology process uses much less energy‚ which will reduce manufacturing costs and keep USEC on the leading edge of technology in the enrichment market space. As with
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returns. - Calculate the value and yield of corporate bonds‚ preferred stocks‚ and common stocks. - Evaluate financial assets and portfolios using fundamental analysis‚ modern portfolio theory‚ CAPM‚ and capital structure. - Calculate the weighted average cost of capital for a firm‚ and explain how to determine target capital structure. - Understand payout policy (by dividend‚ or share repurchase). - Use MS excel in all above calculations and analyses. Text books: Eugene Brigham and Michael
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Q1. Why is Amazon’s cash cycle so much shorter than that of competitor Barnes & Noble? How does this comparison affect financial management decisions of other retailers? The market value of Amazon is much higher than Barnes & Noble. They are also in better marketing position then Barnes and Noble. Barnes & Noble has been on the rocks for a long time and failed to make headway in international markets with their Nook ereaders. The best answer I can give is because Amazon is a much larger company
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