...Long-Term Financing Long- term financing strategies are used by financial managers to insure that funds invested today will increase in value or stay the same over a stated period of time. This document will compare and contrast the capital asset pricing model (CAPM) and discounted cash flow method (DCF). The debt and equity mix are intended to enable an organization to capitalize on investments. The debt and equity mix will be reviewed as will the characteristics of the financial market and debt and equity instruments. Long-term finance options will be analyzed. Valuation Models The Discounted Cash Flows Model (DCFM) and the Capital Asset Pricing Model (CAPM) are examples of estimation tools used to determine present securities values through the time value of money. DFCM uses simple discounting of projected cash flows over the life of the security, while CAPM uses a more complicated formula. Both methods apply to individual securities and help investors to decide investment risk choices; however, CAPM also "turns finding the efficient frontier into a doable task, because you only have to calculate the co-variances of every pair of classes, instead of every pair of everything" (Moneychimp, n.d.). The CAPM thereby gains the investor more information about a wider range of securities than the DCFM provides. DFCM uses either the internal rate of return (IRR) or the net present value (NPV) method to calculate present values of future cash flows. Both these methods use standard...
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...is the mortgage amortization calculator from the internet. Using some basic information and a calculator it will help you have an elementary idea of monthly payments. Also, it can give you average information about the period of time needed for the full payment of the loan. Furthermore, an amortization schedule will show the payment, the interests, the distribution of capital, and the unpaid balance of the loan for each month until the full balance is paid off. The online mortgage calculator can be use easily without the need to understand complicated formulas. Simply enter the amount of the mortgage, interest rates and desire period of years, in order to be given immediately the amount of monthly payment plus a division of interest and the principal amount to be paid. With some calculator’s mortgage amortization, you can choose to check the consequences of the monthly over or lack of payments in efforts for the buyer to be mindful of the penalties if there are any in regards to their mortgage. Moreover, the debtor will determine how much they might save on interest payments if they were to pay the prematurely the loan. Prepared with awareness and understanding of your own financial abilities is key to make a tangible and wise decision on purchasing a home. Consequently you will be armed with the knowledge in efforts to negotiate terms and conditions that will be beneficial to your financial long term...
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...Business Terms and Calculations Simple interest and compound interest are the two most common forms of interest, and are utilized most often with banks and lending companies (Hamel, G. 2009). Simple interest is interest that is only applied to a principle value that is owed. If you received a $1,000 loan with an annual simple interest rate of 10%, then you would owe $100 each year on that principle if no payments were made. Compound interest is interest that is not only applied to the principle value owed but also on the interest that has accrued throughout the life of that principle amount. If you received a $1,000 loan with an annual compound interest rate of 10%, then if you failed to make any payments you would owe 1,100 after the first year, 10% on $1,100 after the second year, 10% on $1,210 after the third year, and so forth. The formula that can be used to calculate interest is I = Prt (Interest = Principle*rate*time). Present value and future value are terms that deal with the time value of money (Carther, S., 2009). Present value is the current worth of a future value of money or assets given a particular rate of return. Future value is the value of money or assets at a particular time in the future that is equal to a particular sum today. Say you are given a $100, its present value is $100, but if you invested it into a Certificate of Deposit (CD) for 5 years with a simple interest rate of 10% that $100 has a future value of $150. Typically, an annuity is an...
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...Corporate Finance Arguably, the role of a corporation's management is to increase the value of the firm to its shareholders while observing applicable laws and responsibilities. Corporate finance deals with the strategic financial issues associated with achieving this goal, such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm. Balance Sheet Approach to Valuation If the role of management is to increase the shareholder value, then managers can make better decisions if they can predict the impact of those decisions on the firm's value. By observing the difference in the firm's equity value at different points in time, one can better evaluate the effectiveness of financial decisions. A rudimentary way of valuing the equity of a company is simply to take its balance sheet and subtract liabilities from assets to arrive at the equity value. However, this book value has little resemblance to the real value of the company. First, the assets are recorded at historical costs, which may be much greater than or much less their present market values. Second, assets such as patents, trademarks, loyal customers, and talented managers do not appear on the balance sheet but may have a significant impact on the firm's ability to generate future profits. So while the balance sheet method is simple...
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...investment since 1980. American corporations, for example, increased their acquisitions of foreign targets by 160% between 1980 and 1990. Acquisitions of American targets by foreign companies rose about 50% during the same period. Some transactions, such as Matsushita Electric's $6.9 billion acquisition of MCA, Inc. in 1991, have been quite large. The majority, however, have been well under $100 million in size, suggesting that these transactions are not just the domain of giant multinationals. Evaluating crossborder opportunities is a critical consideration of executives and investors from around the world. The objective of this note is to review basic methods of valuing cross-border investments and the main issues affecting such valuations. It is intended to be a source of guidance, not a comprehensive review of the topic. The basic principles underlying discounted cash flow techniques for domestic valuations are covered in major finance textbooks. This note tries to accomplish two things. First, it raises the implications of a number of issues specific to cross-border valuations. These include: • The choice of currency, foreign (local) or domestic (home), in which to execute the analysis. •...
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...sCAPITAL MANAGEMENT LEGG MASON March 16, 2006 Michael J. Mauboussin Common Errors in DCF Models Do You Use Economically Sound and Transparent Models? Discounted cash flow analysis is the most accurate and flexible method for valuing projects, divisions, and companies. Any analysis, however, is only as accurate as the forecasts it relies on. Errors in estimating the key ingredients of corporate value . . . can lead to mistakes in valuation. Tim Koller, Marc Goedhart, and David Wessels Valuation: Measuring and Managing the Value of Companies 1 A Return to First Principles mmauboussin@lmfunds.com Say you had to come up with a fair offer to buy your local dry cleaner and the seller limited the extent of your financial information to the answers to five questions. Which questions would you ask? Chances are you wouldn’t ask how the quarter is progressing or about last year’s earnings, but you would focus on the prospects for cash coming in versus cash going out over time. Sole proprietors understand intimately that the value of their business hinges on the cash flow the business generates. No distributable cash, no value. Cash puts food on the table and pays the mortgage; earnings do not. Equity investors are business buyers. While most shareholders own only a small fraction of a company, they are owners nonetheless. The source of shareholder value, and value changes, is no different than the sole proprietor’s: it’s all about the cash. Most investors don’t think...
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...CHAPTER 15 Capital Structure: Basic Concepts Multiple Choice Questions: I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed is called: a. homemade leverage. b. dividend recapture. c. the weighted average cost of capital. d. private debt placement. e. personal offset. Difficulty level: Easy MM PROPOSITION I b 2. The proposition that the value of the firm is independent of its capital structure is called: a. the capital asset pricing model. b. MM Proposition I. c. MM Proposition II. d. the law of one price. e. the efficient markets hypothesis. Difficulty level: Easy MM PROPOSITION II c 3. The proposition that the cost of equity is a positive linear function of capital structure is called: a. the capital asset pricing model. b. MM Proposition I. c. MM Proposition II. d. the law of one price. e. the efficient markets hypothesis. Difficulty level: Medium INTEREST TAX SHIELD a 4. The tax savings of the firm derived from the deductibility of interest expense is called the: a. interest tax shield. b. depreciable basis. c. financing umbrella. d. current yield. e. tax-loss carryforward savings. Difficulty level: Easy 15-1 UNLEVERED COST OF CAPITAL b 5. The unlevered cost of capital is: a. the cost of capital for a firm with no equity in its capital structure. b. the cost of capital for a firm with no debt in its capital structure. ...
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...See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/228180753 Arcadian Microarray Technologies, Inc. ARTICLE · OCTOBER 2008 READS 516 2 AUTHORS, INCLUDING: Robert F. Bruner University of Virginia 287 PUBLICATIONS 1,490 CITATIONS SEE PROFILE Available from: Robert F. Bruner Retrieved on: 25 January 2016 Username: TO ACCESS THIS DOCUMENT This is a protected document. The first two pages are available for everyone to see, but only faculty members who have verified faculty status with Darden Business Publishing are able to view this entire inspection copy. Submit VERIFIED FACULTY If you have verified faculty status with Darden Business Publishing, simply enter the same username that you use on the Darden Business Publishing Web site, and then click “Submit.” Please note that this is an inspection copy and is not for classroom use. Faculty Register UNVERIFIED FACULTY If you are teaching faculty and do not yet have verified faculty access with Darden Business Publishing, please click on the “Faculty Register” link and submit your information requesting verified faculty access. Buy Case Now OTHER USERS If you would like to read the full document, click on “Buy Case Now” to be redirected to the Darden Business Publishing Web site where you can purchase this and other Darden cases. If you have any questions or need technical help, please contact Darden Business Publishing...
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...•5. Suppose a Midwest Telephone and Telegraph (MTT) Company bond, maturing in 1 year, can be purchased today for $975. Assuming that the bond is held until maturity, the investor will receive $1,000 (principal) plus 6 percent interest (that is, 0.06 × $1000 = $60). Determine the percentage holding period return on this investment. INTERMEDIATE 6.•a. National Telephone and Telegraph (NTT) Company common stock currently sells for $60 per share. NTT is expected to pay a $4 dividend during the coming year, and the price of the stock is expected to increase to $65 a year from now. Determine the expected (ex ante) percentage holding period return on NTT common stock. b. Suppose that 1 year later, NTT’s common stock is selling for $75 per share. During the 1-year period, NTT paid a $4 common stock dividend. Determine the realized (ex post) percentage holding period return on NTT common stock. c. Repeat Part b given that NTT’s common stock is selling for $58 1 year later. d. Repeat Part b given that NTT’s common stock is selling for $50 1 year later. INTERMEDIATE 7. One year ago, you purchased a rare Indian-head penny for $14,000. Because of the recession and the need to generate current income, you plan to sell the coin and invest in Treasury bills. The Treasury bill yield now stands at 8 percent, although it was 7 percent one year ago. A coin dealer has offered to pay you $12,800 for the coin. Compute the holding period return on this...
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...Financial Leverage And Capital Structure Policy 0 Chapter Outline The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Capital M&M Propositions I and II with Corporate Taxes Bankruptcy Costs Optimal Capital Structure 1 Capital Restructuring We are going to look at how changes in capital structure affect the value of the firm, all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets The firm can increase leverage by issuing debt and repurchasing outstanding shares The firm can decrease leverage by issuing new shares and retiring outstanding debt 2 Choosing a Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing the value of the firm or minimizing the WACC 3 How does leverage affect the EPS and ROE of a firm? When we increase the amount of debt financing, we increase the fixed interest expense If we have a really good year, then we pay our fixed cost and we have more left over for our stockholders If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders Leverage amplifies the variation in both EPS and ROE 4 The Effect of Leverage Example:...
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...Question: 1. Locate the annual balance sheets for General Motors (GM), Merk (MRK), and Kellogg (K). For each company calculate the long term debt-equity ratio for the prior two years. Why would these companies use such different capitals structures? 2. Look up a company and download the annual income statements. For the most recent year, calculate the average tax rate and EBIT, and find the total interest expense. From the annual balance sheets calculate the total long-term debts (including the portion due within one year). Using the interest expense and total long term debts, calculate the average cost of debt. Next, find the estimated beta for the company on the S&P Stock Report. Use this reported beta, a current T-bill rate, and the historical average market risk premium found in a previous chapter to calculate the levered cost of equity. Now calculate the unleveraged cost of equity, then the unlevered EBIT. What is the unlevered value of the company? What is the value of the interest tax shield and the value of the levered company. Answer: |Company name/Year |Debt-equity ratio 2010 |Debt-equity ratio 2011 | |General Motors (GM) |0.28 |0.31 | |Merck (MRK) |0.28 |0.28 ...
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...Congoleum after an LBO by First Boston found the expected free cash flows generated by this firm from 1980 to 1984. These numbers were based on values provided in the case. From there, we employed the Adjusted Present Value method to discount these cash flows because we assumed that Congoleum was varying its Debt to Equity ratio during those years. We discounted these cash flows by the required return on assets that was in turn calculated through use of the Modigliani-Miller unlevering formula (to derive the Asset Beta) and the Capital Asset Pricing Model. The required return on Congoleum debt was calculated by the expected return of the average CCC-company’s debt and the expected return of debt under default. Then, the present value of financial side effects was taken into account by discounting the interest tax shield by the required return on debt. Finally, we calculated the terminal value of cash flows by assuming a constant 4.14% growth rate in perpetuity and a constant D/E ratio for the years after 1984. Thus, these cash flows were initially discounted under WACC-ME. From there, we factored in prior debt and cash that Congoleum had generated to calculate the total equity value of the firm after the LBO had taken place. Background Congoleum is a firm active in three product market segments: home furnishings, shipbuilding, automotive, and industrial distribution. In the summer of 1979, First Boston Corporation with the help of Prudential Insurance Company proposed a purchase...
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...BERKSHIRE HATHAWAY PURCHASES GEICO WARREN BUFFET Executive Summary Berkshire Hathaway has made a bid for the remaining portion of GEICO stock. This report reviews the offer initiated by Warren Buffett. The details of this report include: • Valuation of GEICO stock. The $70 offer made by Warren Buffett and Berkshire Hathaway includes a 26% premium over the current GEICO stock price of $55.75. This report attempts to determine a range of appropriate stock prices for GEICO. Using the Gordon dividend discount model, along with historical dividend information and projections by Value Line, we estimate the value of GEICO stock in the range of $58 to $80. A review of historical growth rates in GEICO dividends also lends credibility to the investment’s future potential. • Review of Warren Buffett’s investment record. While our analysis lends credence to the bid price of $70 per share for GEICO, we also examine the historical record of Warren Buffett. Buffett’s investment success may add to shareholder’s comfort, as his track record is remarkable when compared to broader market results. • Buffett’s investment philosophy. A letter to shareholders gives us a unique look at Buffett’s considerations for investing. By reviewing his checklist, we attempt to gain insight as to why such a premium is included in the GEICO offer. • Other issues. Buffett’s position on GEICO’s board of directors may shed light on the amount of information Buffett had about the future prospects of GEICO. At first...
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...Adjusted present value Wadia Haddaji February 20, 2008 • Topics: 1. Adjusted present value. • Readings: 1. Brealey, Myers and Allen, section 20.4. 1 The Adjusted-Present-Value Rule • Recall that we can write the value of a levered firm as the value of an otherwise identical all-equity firm and the value of its financing decisions: V = VU +NPV(financing decisions). • It is then obvious to define the APV of a project as the sum of its NPV to an all-equity firm and the PV of the associated financing decisions: APV = NPV(unlevered project) + NPV(financing decisions) • Separating the APV of a project into its NPV to an all-equity firm and the value of the associated financing decisions should be generally useful for the financial manager. 2 A Comparison of WACC and APV • Features/advantages of WACC. 1. WACC accounts for tax shield benefit of interest in discount rate. 2. WACC is widely adopted by practitioners and is easy to use. 3. WACC is applicable when D/E remains essentially constant through project life. 4. WACC is most appropriate when the project is “typical” of the firms traditional businesses (i.e., same risk), or “scale enhancing”. • Features/advantages of APV. 1. APV accounts for tax shield benefit of interest in cash flows (not discount rate). 2. APV was introduced by academics and is slowly being adopted in practice. 3. 11% of firms always or almost always use it. • APV often requires/accomodates knowledge of a particular debt repayment schedule. • APV (as opposed...
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...The Boeing 777 Darden Case Study UVA-F-1017 Case Study Assignment Subject: Cost of capital − cost of equity and cost of debt; beta risk; estimation; capital structure. The task for students is to evaluate the 777 against a financial standard, the investors’ required rate of return. The general objective of this case is to exercise students’ skills in estimating corporate (divisional/project) costs of capital – cost of equity and WACC. Case Questions, Analysis, and Directions: Read and analyze the case, and prepare an “Executive Summary” of this case. Write it as if you were writing it to the members of Boeing’s Board of Directors, who may not know much about the project or finance. Your Executive Summary will include: (1) A brief description of the firm and the 777 project – in your own words (about two-three paragraphs). (2) Which equity beta(s) did you use? Why? (3) When you used the capital-asset-pricing-model (CAPM), what equity-market risk-premium and risk-free rate did you use? Why? (4) Are the betas of other (industry similar) firms important? Why? Can they be used and how? If yes, what adjustments are needed? (5) List and briefly discuss various sources of capital used by Boeing. Evaluate the costs of these individual capital components for Boeing 777 project : (i) What is the cost-of-equity (R0), assuming all-equity financing? (ii) What is the cost-of-equity, considering the Boeing’s target leverage ratio? (iii) What is the cost-of-debt? (iv) What is the appropriate...
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