should comprise 50% of its total capital structure‚ defined as “long-term debt plus book equity.” The correct text should state “long-term debt plus market equity.” Answer the following questions: a. Does Pioneer estimate its overall corporate weighted-average cost of capital correctly? I think they´re WACC is correctly estimated. They use 50% debt and 50% equity‚ which I think is very risky. I would prefer to use a 40% debt and a 60% equity in that way the company would be less riskier. Although I’m
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sales price (1 - F). 8. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them‚ but capital raised by selling new stock or bonds does have a cost. 9. The weighted average cost of capital increases if the total funds required call for an amount of equity in excess of what can be obtained as retained earnings. 10. The marginal cost of capital (MCC) is the cost of the last dollar of new capital that the firm raises
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ventures. Presently the company is at odds over whether they should use a company wide cut off rate based on the overall weighted average cost of capital or if Pioneer should use multiple rates that reflect risk-profit characteristics of the several businesses or economic sectors. At first we must decide if the methodology used in computing the company’s overall weighted average cost of capital is just. Second‚ we should decide in which terms Pioneer adheres to future investments. Should they adjust
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elements in calculating the cost of capital? How would an increase in debt affect it? How would you identify an organization’s optimal cost of capital? Is the cost of capital increasing or decreasing for most companies? DQ 2 What is meant by Weighted Average Cost of Capital (WACC)? What are the components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the impact on WACC when an organization needs to raise long term capital? DQ 3 What is an IPO? How does
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Subject: Business policy and strategies Submitted To: Syed Nauman Ahmad Submitted By: Usman Mustafa Registration #: MBT-f11-145/ Section (A) Date 01-03-2013 Mission statement analysis Warid’s mission statement: We will continue to challenge ourselves and set new performance standards by investing in the future of our people and seeking knowledge and innovation in order to exceed customer expectations and serve our community. Analysis: Customer: In the last line customers
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services. I use Weighted Average Cost of Capital (WACC) as the hurdle rate. The investment projects in our company are selected by discounting the appropriate cash flows by the appropriate hurdle rate for each division. As the vice president of project financeof Marriott Corporation‚ I am conducting an analysis of our company (Marriott Corporation) for calculating the hurdle rates at each of our firm’s three divisions: lodging‚ restaurant and contract services. I use Weighted Average Cost of Capital
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of capital that should be included in the WACC. The WACC calculation should include all the sources of capital like common stock‚ preferred stock‚ bonds and any other long-term debt. b. The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure. (In Millions) c. Based on the suggestion
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Valuation and Capital Budgeting for the Levered Firm Adjusted Present Value 17.1 Honda and GM are competing to sell a fleet of 25 cars to Hertz. Hertz fully depreciates all of its rental cars over five years using the straight-line method. The firm expects the fleet of 25 cars to generate $100‚000 per year in earnings before taxes and depreciation for five years. Hertz is an all-equity firm in the 34-percent tax bracket. The required return on the firm’s unlevered equity is 10 percent‚ and
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rate of return‚ usually U.S. treasury bonds β = Beta for a company E = Expected return of the market (commercial airlines market) (E - Rf) = Sometimes referred to as the risk premium The following table shows the average annual arithmetic returns investors earned on various asset classes over the period 1900 to 2003. (Source: Table 7.1 in Brealey/Myers/Allen) | Nominal Return | Real Return | Common Stocks | 11.7 | 8.5 | Long- term Government Bonds | 5.2 |
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Questions 1. If Symonds Electronics Inc. were to raise all of the required capital by issuing debt‚ what would the impact be on the firm’s shareholders? The impact on shareholders can be analyzed by calculating the EPS and ROE of the firm under the alternative scenarios as follows: All Debt With $5‚000‚000 Expansion Current Growth in Revenues Revenues EBIT Interest EBT EBT*(1-T) # of shares EPS Debt Equity Debt/Equity Ratio Return on Equity 15‚000‚000 2‚250‚000 0 2‚250‚000 1‚350‚000 1‚000‚000 1.35
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