approach (Figure 1 & 3)‚ the risk-free rate (rRF) used is the rate on the U.S. 10-year Treasury bonds‚ which is 1.66. The market risk premium (RPM) is the required return on the stock market minus rRF. The required market return used here is the average 20 years rates of return on S&P 500. With highest beta (0.71)‚ Merck has the higher estimated cost of equity (6.167). Pfizer has lower estimated cost of equity (5.910) with lower beta (0.67). Because of the lowest beta (0.48)‚ Johnson & Johnson
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steps. “We will need to determine the required return for our intended project so that we have a decision criteria defined for the project‚” she says. “Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?” you ask. “I do‚” she smiles. “We can determine the target WACC for Apix Printing Inc.‚ given these assumptions‚” she says as she hands you a piece of paper that says the following: •Weights of 40% debt and 60% common
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DERIVATIVE CASES CASE STUDY II AMERICAN BARRICK RESOURCES CORPORATION: MANAGING GOLD PRICE RISK Group II - Cohort 5 American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995‚ American Barrick ’s latest
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assumptions did you use? This project’s cash flows are projected over twenty years based on three assumptions or scenarios for the product’s demand: Weak‚ Average‚ and Strong. Each scenario’s variables are outlined in the Table 1 below: Table 1: Assumptions / Scenarios4 Demand Probability Price/Unit Units Sold/Year Weak 20% $1‚450 42K Average 50% $1‚500 41K Strong 30% $1‚550 40K Additional project data‚ outlined
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1. Are the four components of Marriott’s Financial Strategy consistent with its growth objective? Marriott’s sales grew up by 24% and its return on equity stood at 22% in the year 1987‚ the sales and earnings per share has doubled over the previous year as stated in the case study. The company operates in three divisions: lodging‚ contract services and restaurants which represents 41%‚ 46% and 13% of sales in 1987 respectively. Marriott is determined to develop and to enhance its position in each
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following does NOT always increase a company’s market value? (Points : 5) Increasing the expected growth rate of sales Increasing the expected operating profitability (NOPAT/Sales) Decreasing the capital requirements (Capital/Sales) Decreasing the weighted average cost of capital Increasing the expected rate of return on invested capital | 2. (TCO F) Which of the following statements is correct? (Points : 5) For a project with normal cash flows‚ any change in the WACC will change both the NPV and the
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must be separately calculated for each part of the company and for each of their projects. 2. What is the weighted average cost of capital for Marriott Corporation? The WACC for Marriot Corp is 9.76%--See calculations bellow: In order to find the WACC for Marriot Corporation we need to find the elements needed for such calculation: TAX RATE. Based on Exhibit 1‚ the average tax rate used from 1978 to 1987 is 41%. However the most recent tax rate used (1987) was 44%. We will use the
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The Cost of Capital 1 Background As investors desire to obtain the best/highest return on their investments in securities such as shares (Equity) and loans to companies such as debentures (Debt)‚ these returns are costs to the companies paying these Dividends (on equity) and Interest (on Debts)! It all depends on the perspective from which we chose to view the calculation (are we Earning or Paying?) Companies MUST consider the cost of financing they receive in the form of equity or debt if they
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WACC is the weighted average cost of capital. It is a calculation of the firms cost of capital taking into account the relevant weight of equity and debt as a proportion of the total. The cost of equity or KE calculated using a risk free rate example German 5yr government bond‚ the firm’s beta and the return on the market. The firm’s beta is a calculation of the firms exposure to the market‚ a beta of less than 1 indicates that the firm is not as influenced by external factors as the average firm in
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If we would like to figure out assumption 2 is correct or not‚ we should do the flowing data Analysis. If WACC < IRR‚ then we can launch this project. Of NPV is bigger than zero‚ we could launch this project as well. Analysis 1: WACC( Weighted average cost of capital) : E=10825 million‚ total value= 48978 million Re= Rf+β(Rm-Rf) Rf=3.52 Rm=10.23 β=1.16 (http://www.abg-analytics.com/stock-betas.shtml#.Uu65aLS2zDM) Re= 11.3 D=38153 tax rate = 34.00% Rd=6.6 WACC =11.84 Analysis 2:
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