return‚ and growth rate calculation of preferred stock price‚ rate of return for preferred stock given other variables (including flotation cost) calculation of cost of equity from retained earnings using CAPM APPROACH calculation of weighted average cost of capital (WACC) calculation of component cost of debt in WACC calculation of cost of equity from retained earnings using dcf apporach calculation of cost of equity by selling new common stock using dcf apporach Calculation
Premium Weighted average cost of capital Net present value Stock market
CASE STUDY 1: The Wm. Wrigley Jr. Company capital structure‚ valuation‚ and cost of capital [10 MARKS OUT OF 100 MARKS TOTAL] Semester 1‚ 2013 Background: The term capital structure refers to the way a corporation finances its assets through some combination of equity and debt. Each form has its own benefits and drawbacks and firm managers attempt to find the perfect capital structure in terms of risk / reward payoff for shareholders. See these podcasts:
Premium Weighted average cost of capital Finance Stock
the return is expected to exceed the cost of capital • Return = Cost of Capital : value unchanged • Return > Cost of Capital : firm’s value increases • Return < Cost of Capital : bad investment Weighted Average Cost of Capital (K) • When a firm has both debt and equity financing‚ weighted average cost of capital: K = (1-λ)K+ λ(1- t)i K = (1-λ)KL + λi(1- t) • (1- λ) = weight of cost of capital that is from equity • KL = cost of equity capital • λ = debt-to-total-market-value ratio
Premium Financial markets Stock market Finance
Examining the components of economic profit and studying the finer points of its calculation require an understanding of its underlying principles. Here we look at how it matters as a performance measure - which is distinct from a wealth metric - and how it is closely related to market value added (MVA). Finally‚ in establishing an overall picture of economic profit‚ we help you undo any perceived complexity by showing how all of the calculations surrounding economic profit originate from three main
Premium Discounted cash flow Generally Accepted Accounting Principles Weighted average cost of capital
2.0 2.13 11.67 Hatfield’s weaknesses appear to be in their inventory/sales which is 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
Premium Finance Balance sheet Dividend
to decide on a beta to use for Nike Inc. for use in the CAPM approach. The logical choice was to use the average (0.80) to account for the large fluctuations seen in Nike’s historic betas. We felt that the YTD beta was a reflection of current business practices‚ but the goal of Nike Inc. was to look forward and gain back market share and increase revenues. Consequently‚ we felt the average beta reflected the historical business practices of Nike Inc. better .From here‚ we calculated the cost of
Premium Arithmetic mean Interest Weighted average cost of capital
Problem 3 Accounting Chapter 21 Problem 3 A firm’s current balance sheet is as follows: Assets = $100 Debt = $10 Equity = $90 A. What is the firm’s weighted-average cost of capital at various combinations of debt and equity‚ given the following information? Debt/Assets | After-tax Cost of Debt | Cost of Equity | Cost of Capital | 0% | 8% | 12% | 12.00% | 10% | 8% | 12% | 11.60% | 20% | 8% | 12% | 11.20% | 30% | 8% | 13% | 11.50% | 40% | 9% | 14% | 12.00% | 50%
Premium Finance Capital structure Debt
predetermined WACC value Calculating the discount factor based on the CAPM approach Considering sensitivity analysis 3 Understanding the WACC The Weighted Average Cost of Capital is the interest rate (minimal return) at which investor-supplied capital (equity and interest bearing loans) has been provided. Therefore‚ it is the weighted average minimum expectation‚ which shareholders and creditors require for their respective investments made with the company under consideration. The WACC reflects
Premium Arithmetic mean Weighted average cost of capital Average
CHAPTER 13 CAPITAL STRUCTURE AND LEVERAGE (Difficulty: E = Easy‚ M = Medium‚ and T = Tough) Multiple Choice: Conceptual Easy: Business risk Answer: c Diff: E [i]. A decrease in the debt ratio will generally have no effect on . a. Financial risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will affect each type of risk above.) Business risk Answer: d Diff: E [ii]. Business risk
Premium Stock market Finance Stock
a company’s ability to meet interest payments. * The interest coverage ratio was calculated by an estimate of the 2002 EBIT divided by the debt interest expense (debt * interest expense). * We calculated the 2002 EBIT by calculating the average growth rate of the EBIT from 1999-2001. This growth rate was calculated to be 8.19% * The investment grade was determined from the market value of equity‚ thus an AA/A. * The interest
Premium Weighted average cost of capital Finance