Chapter 14 The Cost of Capital 14-1. Templeton’s investment of $400M will be financed with $300M in debt and $100M in equity. Thus after the purchase‚ Templeton’s balance sheet (market value and book value‚ at t = 0) will look like this: ASSETS $400‚000‚000 DEBT $300‚000‚000 $400‚000‚000 EQUITY $100‚000‚000 $400‚000‚000 ) = 75% in debt financing‚ and ( $100‚000‚000 ) = 25% in equity Thus Templeton is using ( $300‚000‚000 $400‚000‚000 $400‚000‚000 financing. Its debt and equity weights are therefore
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one of our products every time they visit the grocery store. In this business model for our company‚ we include the important inputs and assumptions for the Balance Sheet (historical and future data)‚ Income statements and other estimated model – WACC‚ Terminal Value‚ Enterprise Value‚ Stock Price‚ etc. After estimating enterprise values in the future‚ we can find that our company is undervalued. Stock holders are supposed to add holdings of shares and gain more equity. Analysis of the Model
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CASE 51: BROWN-FORMAN DISTILLERS CORPORATION 1. Why is Brown Forman considering buying Southern Comfort? As a leading producer‚ marketer and importer of wines and distilled spirits‚ Brown-Forman (BF) was the fifth-largest distiller in the United States. In the late 1970’s‚ the whiskey market declined and this presented BF with growth challenges in a mature market. BF’s response to market pressures and competition was to aggressively attempt into other faster growing divisions of the alcohol beverage
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A company’s capital structure is a very important component of a company’s financial health and longevity. The capital structure should maximize total net profit and overall shareholder wealth. An optimal proportion of equity and debt as a company’s capital structure is an indication of a well-managed and successful company and should be a goal for most corporations. Beverly Flax and Rick Rosenfield founded California Pizza Kitchen (CPK) in 1985 in Beverly Hills‚ California. It is a casual dining
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What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? WACC is the weighted average cost of capital. It can be calculated as: WACC = (Weight of funding source 1) x (Cost of funding source 1) + … + (Weight of funding source n) x (Cost of funding source n) Usually this will be simply: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity) It is important to estimate
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Abstract Ralph Lauren Corporation (NYSE:RL) is well known in the apparel clothing field. The corporation engages in the design‚ marketing and distribution of lifestyle product. This analysis paper will illustrate the current financial situation and forecast the future free cash flow based on the previous financial statement and financial data collected. These information and forecast are served for the potential investor to have a general understanding of RL Corporation and make the right choice
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equity of 8%‚ a cost of debt of 5%. It stock is traded at $10/share‚ and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC? Equity Value = 10*10=$100 million‚ Debt Value=$20 million So‚ equity weight = 100/120=83.3%‚ debt weight=20/120=16.7% After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt =83.3%*8%+16.7%*5%*(1-40%) = 7.2% 4. Suppose you are the founder of a private company
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recalculates the WACC to obtain the most accurate cost of capital. In the cost of equity calculation‚ we will use CAPM‚ the dividend discount model (DDM)‚ and the earnings capitalization model (ECM) to see the different in each and suggest the most suitable one. To sum it up‚ Ford is suggested to add Nike’s shares to its portfolio. Cohen’s Flaws According to the Cohen’s exhibits‚ there are 2 main flaws in her calculation of cost of capital and they are: 1. It’s correct that she used WACC since the
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Cost of Capital (WACC) • Capital structure components should be measured on a market value basis‚ not a book value or historic basis • Use a target capital structure rather than the current or historic capital structure • T always means the incremental tax-rate • Debt includes long-term debt‚ financing leases‚ short-term debt‚ operating leases used as permanent financing‚ off-balance financing transactions • If cash flows are real‚ first compute nominal WACC‚ then subtract inflation
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final decision to proceed the plan. In this case‚ we cautiously made assumptions when estimating cost of debt‚ commercial-defense beta ratio‚ risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2. Capital Budgeting Decision Rule According to detailed free cash flow forecast for the 7E7 project from 2004 to 2037‚ Baseline estimated the Internal Required Return (IRR)
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