CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target 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
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investment decisions is explored. In the framework of a target capital structure‚ the weighted average cost of capital is then applied to capital investment decisions. PMF DISK PMF Tutor: Cost of Capital Topics from this chapter covered in the PMF Tutor are after-tax cost of debt; cost of preferred stock; cost of common stock‚ CAPM; cost of common stock‚ constant growth; cost of new common stock; and weighted average cost of capital. PMF Problem- Solver: Cost of Capital This module allows the student
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Cost of Capital Firms need to make capital investment i.e.‚ purchasing fixed assets such as factories‚ machineries‚ equipment‚ etc. After deciding what capital investments to make‚ they need to decide on the financing – sources of capital. The sources: Long-Term Debt‚ Common Stock‚ Preferred Stock and Retained Earnings. Then they need to find the cost of obtaining each source of financing today (not historical). Cost of Capital - The rate of return that a firm must earn on its investment
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Pricing Model (CAPM). The Weight Average Cost of Capital (WACC) and how Pfizer uses this method will be reviewed. Additionally‚ each phase of developing and creating new value added drugs role financially will be addressed. According to Parrino‚ Kidwell and Bates (2012)‚ the capital asset pricing model describes the relationship between an associated risk and the expected return on an asset. Pfizer uses the CAPM to determine its cost of capital or the weighted average of the costs of debt and equity
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Red Hen Baking Company Red Hen Baking Company Case Study Company profile Randy George established Red Hen Baking Company in 1999. Red Hen Baking Company specializes in artisan bread and their mission is “to produce premium quality breads and pastries with traditional methods and carefully selected high quality ingredients. To do this while striving to minimize our impact on the environment‚ to support the growers and producers of our ingredients‚ and to provide the finest baked goods and
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The Boeing 7E7 Boeing is one of the largest and one of the most well-know companies for their aerospace developments in the commercial airplane and integrated defense systems markets. At this time the company currently lost its number one position in the commercial airplane market to Airbus‚ whom has over 50% market share in units sold and in dollar value of sales received. Boeing’s company is composed 54% from their commercial segment and 46% from their defense system segment. Earlier this year
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using one single company-wide cutoff rate that is based on their overall weighted cost of capital. The current single rate system that PP is using has increased their overall risk by causing them to choose investment decisions in divisions with higher risk because they exceed the cutoff hurdle‚ while not investing in lower risk areas because they do not exceed the hurdle rate. In addition PP has not been calculating their weighted cost of capital correctly. This has caused them to invest in riskier areas
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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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Financial Decision Analysis~Marriott Corporation Case Study Executive Summary – Q5 – Hurdle Rate Analysis Hurdle rates‚ the weighted cost of capital that projected cash flows must exceed for initiatives to be considered‚ vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept‚ to adjust the rate at which the firm grows and as a measure for compensation within each business area‚ and as incentive
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company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company’s cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC). In our analysis‚ we examine why WACC is important in decision making and we show how WACC for Nike Inc. is calculated correctly. Also‚ we calculate the company’s cost of equity using three different models: the Capital
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