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 of capital
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Cost of debt When individuals use the cost of debt‚ they should know the measurement of the interest rate‚ or the yield paid to the bondholders. When analyzing the cost of debt‚ people should know that it ’s an effective rate that businesses are willing to pay on the current debt that they have accrued. The cost of debt is a measurement of the before or after tax returns. Considering the case that individuals can deduct the interest‚ makes the tax after cost more popular than the before tax. A business
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Cost of Debt and Cost of Equity: Cost of Debt is the interest rate and the Cost of Equity is the expected rate of return demanded by investors in the firm’s common stock. The issue at hand is finding the correct costs of debt and equity in order to find an accurate calculation of WACC. Cohen used the 20-year yield on U.S. Treasuries as the risk free rate‚ which we found to be the correct figure given that Nike Inc. debt was valued over 25 years. Because there is no other given yield that is comparable
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recapitalization Wrigley’s prerecapitalization WACC is 10.9%. The cost of equity assumes a risk-free rate of 5.65% for 20-year U.S. Treasuries (case Exhibit 7)‚ a risk premium is assumed 7% (or 5%)‚ and uses Wrigley’s current beta of 0.75 (case Exhibit 5). 4. WACC after recapitalization The increase in leverage will affect Wrigley’s WACC in at least three ways: 1. Cost of debt: Wrigley’s debt rating will change from AAA (consistent with no debt) to a BB/B rating reflecting the higher risk. The postrecapitalization
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bias formula Thomas Noe Balliol College/SBS 21st October‚ 2013 This note relates to the derivation of the “quick and dirty” formula for estimating the bias generated by using the YTM as an approximation of the expected return on debt. The assumptions: 1. Debt is perpetual 2. probability of default is δ in each period. The probability is the same in every period 3. If default occurs‚ bondholders receive ρ fraction of the face (principal) value of the bond plus accrued interest. 4. Bond is
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Statement of the Problem: The William Wrigley Company is the world’s largest manufacturer and distributor of chewing gum. Over the preceding two years‚ revenues had grown at an annual compound rate of 10% and earnings grew 9%‚ these increases are a direct result of the introduction of new products and foreign expansion. As illustrated in the graphical diagrams in Exhibit 4 (appendix)‚ the company’s stock price had significantly outperformed the S&P 500 Composite Index‚ and performed slightly ahead
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INTRODUCTION * Wrigley has a one sided capital structure * Their interest rates has been at their lowest in 50 years * However‚ they have the leading market share in a stale low technology business * Blanka Dobrynin‚ the managing partner of Aurora Borealis LLC (a company who used a hedge fund to invest in companies who are in distress‚ merger arbitrage‚ change-of-control transactions‚ and recapitalization) wanted to investigate a potential investment of $3B in Wrigley * Wrigley being an
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BUSINESS RESEARCH METHODOLOGY BOARD EFFECTIVENESS AND COST OF DEBT by : FARUQ AKURAT 100810251004 ECONOMIC FACULTY JEMBER UNIVERSITY 2011 / 2012 Board Effectiveness and Cost of Debt ABSTRACT Does the board of directors influence cost of debt financing? This study of a sample of Spanish listed companies during the period 2004–2007 provides some evidence about the question. The results suggest that two board attributes – director ownership and board activity – appear to influence
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| Table of Contents Cost of Capital 2 Value of Equity 2 Cost of Equity 2 CAPM Model 2 Dividend Growth Model 3 Value of Debt 3 Cost of Debt 4 WACC (Weighted Average Cost of Capital) 4 Comparison to Joanna Cohen’s Analysis 4 Financial Statement Analysis 5 Nike Inc. 5 Financial Ratios 6 Leverage Ratios 6 Efficiency Ratios 6 Liquidity Ratios 7 Profitability Ratios 7 Valuation Ratios 7 Conclusion 8 Appendix A – Ratio Calculation 9 Leverage Ratios 9 Efficiency Ratios 9 Liquidity Ratios
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in the use of debt financing. Upon closer inspection‚ I have noticed that your company uses no debt at all. As an experienced hedge fund manager‚ I am concerned that your management is missing valuable opportunities by excluding debt from your capital structure. My partner‚ Susan Chandler‚ and I have done extensive research on how undergoing a capital reconstruction process can benefit you in the long run. If your company decides to recapitalize‚ there are a few ways in which the debt can be used
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