production would begin in 2008. The project will cost $18 million‚ with $16 million in 2007 and an additional $2 million in 2008. The $18 million investment will be depreciated using the straight-line method for six years and a zero salvage value. Although‚ the equipment is believed to be able to be sold at the end of the project for $1.8 million. The main purpose of the project is to save on operational costs by producing shortwood. The cost savings is estimated to be $2 million in the first
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shareholder value‚ optimize the use of debt in the capital structure‚ and repurchase undervalued shares 2) Marriott uses WACC to measure the opportunity costs of capital of investments with similar risks. Each division of Marriott has a different cost of capital‚ based on debt capacity‚ debt cost‚ and equity cost. They use the estimate of cost of capital to determine the fraction of debt that should be floating rate debt. WACC is also used to determine the premium above government bond rates for
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to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC is the weighted average cost of capital. It can be calculated as: WACC = (Weight of funding source 1) x (Cost of funding source 1) + … + (Weight of funding source n) x (Cost of funding source n) Usually this will be simply: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity) It is important to estimate a firm’s cost of capital for the appraisal
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million to acquire ATC by LBO with 5.5% of an annual interest rate payable monthly over and over 10 years. But at the end of year 5‚ it will make a bullet payment to repay all remaining debtor‚ in order to render ATC’s D/E ratio closer to the industry average. Which is good for ATC due to the deceasing debt then decreased the financial risk. Therefore‚ in the period of 2008 to 2012‚ ATC’s debt level is predetermined so that APV valuation method is suitable for this period. Because of the interest tax shield
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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
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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
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Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure. In order to find the WACC‚ we need to find the cost of the components of the capital structure and their proportion in the total capital. Cost of Debt – To find the cost of debt‚ we use the details of the bonds issued by Rollins Instruments. The bonds have 20 years to maturity‚ pay interest at 9.3%‚ have a par value of $1‚000 and are currently selling for $890. The cost of debt is
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growth rates. During the period‚ the net income of Walgreens grew at 14 percent per year‚ while Wrigley’s net income grew at 10 percent per year. Even though Walgreens was one of the fastest-growing companies in the United States during this time‚ its average annual shareholder returns were 16 percent‚ compared with 17 percent for the significantly slower-growing Wrigley. The reason Wrigley could create slightly more value than Walgreens despite 40 percent slower growth was that it earned a 28 percent
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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 the risk structure of the company. For example‚ think about what would happen if the Plastic Products Division received a disproportionately high level of funding because their returns exceed the company hurdle rates (its growth rate substantially exceeds the corporate average). Assuming that the risk of the division remains unchanged
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Apple ’s financial performance continued to strengthen over the last several quarters. In the most recent earnings announcement‚ Apple reported significant growth in net revenues driven by the strong performance of its iPod product line. Net sales for the 2nd quarter grew to $4.36 billion‚ which is a 34% increase over 2nd quarter 2005 results. Net income increased by 41% to $410 million. (Apple Reports)The iPod product line continues to drive the financial performance of the company. In the 2nd quarter
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