be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company’s average business activities it is reasonable to use the company’s average cost of capital as a basis for the evaluation. A company’s securities typically include both debt and equity‚ one must therefore calculate both the cost of debt and the cost of equity to determine a company’s cost
Premium Interest Investment Finance
17.05% | 18.15% | 18.30% | Cost of debt (Rd) | 9.03% | 9.39% | 9.16% | 9.43% | Effective tax rate (t) | 43.68% | 43.68% | 43.68% | 43.68% | WACC | 8.68% | 12.35% | 12.69% | 10.51% | Overall‚ Contract Services division has the highest weighted average cost of capital and Lodging division has the lowest. Since different lines of business are different in nature‚ this estimation is reasonable. Financial Strategies of Marriott Corporation Marriott Corporation is an international company whose
Premium Weighted average cost of capital Debt
Midland Energy Resources Case Analysis Midland Energy Capital Planning Model • Fund significant overseas growth • As domestic natural resources dwindle‚ overseas investments are the main drivers of growth for Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006‚ 77.7% of Midland’s total earnings from equity affiliates came from non-US investments. • Invest in value creating
Premium Weighted average cost of capital Corporate finance Investment
look like requires knowledge of the long-term growth rate‚ operating margin‚ weighted average cost of capital‚ discount rate and reinvestment rate. This makes using discounted cash flows especially difficult young companies. The discounted cash flow‚ in Exhibit #1 below‚ shows an imputed value of $109 per share versus the current market price of $246 per share. This calculation is based on an industry average weighted average cost of capital of 10% and a discount rate of 4%. However the key point is
Premium Net present value Cash flow Discounted cash flow
Introduction: (Luz’s answer for discussion question #1 should go here) Analysis: Based on her calculations‚ Joanna Cohen estimated that Nike’s cost of capital was approximately 8.4%. Ms. Cohen used a single Weighted Average Cost of Capital to calculate the firm’s cost of capital‚ and we agree that only a single cost of capital needs to be used due to the similarities between more than 95% of their revenues. However we believe that the cost of capital calculation is inaccurate based on some
Premium Stock Weighted average cost of capital Financial markets
Introduction Every business decision is associated in one way or another with the financial condition of the organization. The results of a working capital analysis will assist in the determination of organization¡¦s ability to remain in a particular line of business. The primary focus of Team C¡¦s analysis of Wal-Mart‚ Inc is its current and future financial condition. The most imperative areas that are found in the Capital Structure Analysis Report fall into the following categories: Working
Premium Inventory Financial ratios Financial ratio
debt no longer outweigh the increased risks and expenses associated with financing (Wenk‚ 2012) 3. Cash Flow: Analyzes a firm’s debt capacity by using the weighted average of cost of capital (WACC). The WACC is a calculation of a firm’s cost of capital in which each capital source (bonds‚ stock and other long-term debt) are proportionally weighted to determine how much interest the company has to pay for every dollar it finances (Investopedia‚ 2012). Part of Competition Bikes’ (CB) main consideration
Premium Net present value Cash flow Corporate finance
calculations. Is Midland’s choice of EMRP appropriate? If not‚ what recommendations would you make and why? The appropriate EMRP to use in the 2007 WACC calculation is 6.0% as listed in Table 2. Team 1 compared this rate to real-world data using the average annual total return on common stocks from Yahoo! Finance and the risk free rate from Exhibit 1. EMRP= rm-rf EMRP=10.3%-4.85%= 5.45% 6.0% is reasonable for the Market Risk Premium in the WACC calculation. Midland’s Equity Market Value from
Premium Weighted average cost of capital Investment Finance
The Capital Assets Price Model (CAPM)‚ is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return‚ which is often used to estimate a cost of equity (Wikipedia‚ 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:
Premium Interest Weighted average cost of capital Net present value
FCFs • Total Present Value of Unlevered Cash Flows 2008 – 2012: $1.272 B Excludes terminal value ACC Calculating Terminal Value • Common Assumption: Future cash flows look like the last FCF‚ times a growth factor • Using Weighted-Average Cost of Capital (WACC) we discount all perpetual future cash flows • Terminal Value of Perpetual Future Cash Flows: $6.322 B ACC
Premium Gross domestic product Weighted average cost of capital Fundamental analysis