...business, and Petrochemical was Midland’s smallest yet still substantial business. In 2007, Midland’s financial strategy will mainly focuses on four aspects: 1) Fund Overseas Growth; 2) Value-creating Investments; 3) Optimize Capital Structure; 4) Repurchase undervalued stocks. Fund Overseas Growth: Due to the exploited domestic resources in the domestic market, overseas investment will be the main sources for economic growth in Midland as a form of specialized financial and contractual arrangements similar to project financing, all of which are valued in dollars. Value-creating Investments: Discounted Cash Flow (DCF) methods, involving debt-free cash flows and a hurdle rate equal to or derived from the WACC for the project of division, are typically used to evaluate most prospective investment, yet for overseas projects are evaluated as streams of future equity cash flows and discounted as a rate based on the cost of equity. Optimize Capital Structure: Midland optimized its capital structure by carefully exploring the borrowing capacity inherent in its energy reserves and in long-lived productive assets such as refining facilities, and based on the annual operating cash flow and collateral value of its identifiable assets, each division has its own target debt ratio. Repurchase undervalued stocks: Possibilities to repurchase its own shares when potential...
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...Midland Energy Resource Report for Cost of Capital October 16, 2014 Abstraction General Analysis of Midland Energy Resources Cost of Debt • • • • Consolidated Company Exploration & Production Refining and Marketing Petrochemicals Cost of Equity Equity market risk premium of 5% is reasonable. According to the Exhibit 6, the U.S. stock return minus Treasury bond yields for each period varies. Since each period has different standard error, it will be better to take the weighted average of the data, then EMRP is approximately 5.9% or lets say 6.0%. Comparing to the EMRP that Midland would use in the calculation of WACC which is 5%, the historical data reflects a higher EMRP. But from the market risk premium survey results, we see that finance professors, CFOs and fund managers advocate a lower rate on risk premium. Because these people have better understanding in the performance of the market and be more aware of how economics works, then the analysis from them should be taken into great consideration. Therefore, 6.0% from the past data balanced with some lower rates that suggested by bankers, auditors as well as Wall Street analysts, 5% should be appropriate. Weighted Average Cost of Capital WACC = λ(1 − t)KD + (1 − λ)KE The Effect of Leverage on the Cost of Equity and WACC Cost of Equity The relation between cost of equity and leverage can be shown as follows: βEquity = 1 βU (1 − λ) Asset Cost of Equity = Risk Free Rate + βEquity × (Risk Premium) We further illustrate...
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...CHAPTER 10 The Cost of Capital Problem solving Lidija Dedi 9-1 Problem 1: Your company’ stock sells for $50 per share, its last dividend was $2, its growth rate is a constant 5%, and the company will incur a flotation cost of 15% if it sells new common stock. What is the firm’s cost of new equity? 9-2 Problem 2: Alpha’s stock currently has a price of $50 per share and is expected to pay a year-end dividend of 2,50 per share. The dividend is expected to grow at a constant rate of 4% per year The company has insufficient retained earnings to fund capital projects and must therefore, issue new common stock. The new stock has an estimated flotation cost of $3 per share What is the company’s cost of equity capital?9-3 Problem 3: Current market price of the firm’s stock is $28 Its last dividend was $2,20 Its expected dividend growth rate is 6% Calculate cost of retained earnings? 9-4 Problem 4: The company capital structure is 70% equity and 30% debt The yield to maturity on the company’s bonds is 9% The company’s year-end dividend is forecasted to be $0,80 a share The company expects that its dividend will grow at a constant rate of 9% a year The company’s stock price is $25 The company’s tax rate is 40% 9-5 The company anticipates that it will need to raise new common stock this year Its investment bankers anticipate that the total flotation cost will equal 10% of the amount issued Assume the company accounts...
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...MANAGEMENT ADVISORY SERVICES COST OF CAPITAL THEORY 1. All of the following statements are correct except: a. The matching of asset and liability maturities is considered desirable because this strategy minimizes interest rate risk. b. Default risk refers to the inability of the firm to pay off its maturing obligations. c. The matching of assets and liability maturities lowers default risk. d. An increase in the payables deferral period will lead to a reduction in the need to non-spontaneous funding. 2. Which of the following would increase risk? a. Increase the level of working capital. b. Change the composition of working capital to include more liquid assets. c. Increase the amount of short-term borrowing. d. Increase the amount of equity financing. 3. A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios characterizes the firm with the greatest amount of financial risk? A. High debt-to-equity ratio, high interest coverage ratio, stable return on equity. B. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity. C. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity. D. Low debt-to-equity ratio, high interest coverage ratio, stable return on equity. 4. Which of the following classes of securities are listed in order from lowest risk/opportunity for return to highest risk/opportunity for...
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...Assignment Source Document: HBS case- Marriott Corporation: cost of capital Prepare a case discussion report. The report must at least address the following issues 1. Are the four components of Marriott’s financial strategy consistent with its growth objective? Marriot has following four financial strategy components * Manage rather than own hotel assets. * Invest in projects that increase shareholders values * Optimize the use of debt in the capital structure * Repurchased undervalued shares. The company operates in three divisions having following sales and profit figues (1987) 1. Lodging (41% of sales and 46% of profit) 2. Contract services (46% of sales and 33% of profit) 3. Restaurants (13% of sales and 16% of profit). 2. How does Marriott use its estimate of cost of capital? Does it make sense? Marriott measured the cost of capital for investments of similar risk using the weighted average cost of capital (WACC).Firm WACC is the overall required return on the firm as a whole and it is used by management to determine appropriate investments that could boost the return on its investment and profitability. 3. What is the WACC for Marriott Corp? a. What risk-free rate and risk premium did you use to calculate the cost of equity? Marriot uses CAPM ( Capital asset pricing model) evaluate cost of equity re = risk free rate + beta * risk premium Equity beta given is 1.11 but it is a leveraged beta . In order...
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...Juan A. Torres Rodriguez D01596038 Mini Case Assignment Target Corp. started in 1902 as Dayton’s Dry Goods company. At 1911, Dayton’s Dry Goods is renames as Dayton Company, and commonly known as Dayton’s Department Store. In 1946 Dayton’s Department Stores started giving the community back 5% of their pretax profits, a practice that Target Corp still maintains. During the 1960’s Dayton’s create a new kind of store to appeal the masses called Target, opening the first Target store in the Twin Cities on May 1, 1962. The industry sector in which Target Corporation competes is in the retail sector reaching the $62.87 Billion in sales. As mentioned above, Target competes in the retail sector, which makes the operating risks of the company mainly focused on customer’s perceptions, differentiation of brand, and anticipating consumer preferences to boost their sales, gross margin and profitability. If we take a look at Target’s 10K, the first risk factor they mention is the ability of differentiate the business from other retailers by creating attractive value propositions through a careful combination of price, merchandise assortment, convenience, guest service and marketing efforts. Another risk that all companies in this sector face is the macroeconomic condition of the country and the impact this has in their consumers. This lead us to the financial risk the company might have. One of the financial risks we have to consider in any type of company is the debt...
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...[pic] King Saud University College of Administrative Sciences Strategic Management 597 BUS Case analysis Target Corporation Professor Dr. Nadia Ayoub Submit by Ghadeer Al- Mutawa Reem Abdul Jabbar 9, January 2007 Contents Introduction Vision Statement Mission Statement Strategy Analysis State 1: The Input Stage External Factor Evaluation o Opportunities o Threats Competitive Profile Matrix Internal Factor Evaluation o Strengths o Weaknesses Summary of Financial Ratios in Target Corporation Stage 2: The Matching Stage 1) The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, 2) The Strategic Position and Action Evaluation (SPACE) Matrix, 3) The Grand Strategy Matrix, 4) The Internal-External (IE) Matrix. Summary of Matrix Analysis Stage 3: The Decision Stage Quantitative Strategic Planning Model [QSPM] Recommendations Epilogue Introduction Target Corporation is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. Target Corporation is the third-largest general merchandise retailer in the United States. It offers an assortment of general merchandise, including consumables...
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...analysis Target Corporation Professor Contents Introduction Vision Statement Mission Statement Strategy Analysis State 1: The Input Stage External Factor Evaluation o Opportunities o Threats Competitive Profile Matrix Internal Factor Evaluation o Strengths o Weaknesses Summary of Financial Ratios in Target Corporation Stage 2: The Matching Stage 1) The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, 2) The Strategic Position and Action Evaluation (SPACE) Matrix, 3) The Grand Strategy Matrix, 4) The Internal-External (IE) Matrix. Summary of Matrix Analysis Stage 3: The Decision Stage Quantitative Strategic Planning Model [QSPM] Recommendations Epilogue Introduction Target Corporation is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. Target Corporation is the third-largest general merchandise retailer in the United States. It offers an assortment of general merchandise, including consumables and commodities; electronics, entertainment, sporting goods, and toys; apparel and accessories; and home furnishings and decor; as well as a line of food items. The company operates its stores under Target and SuperTarget brands. It also sells its merchandise online, as well as offers credit cards to its customers. In addition, the company runs Target Clinics...
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...PART 1 Company Allocation Ticker symbol | Company | | GICS Sector | GICS Sub Industry | Address of Headquarters | | BEN | Franklin Resources | | Financials | Diversified Financial Services | San Mateo, California | | FCX | Freeport-McMoran Cp & Gld | | Materials | Diversified Metals & Mining | Phoenix, Arizona | | The cost of capital of the aforementioned companies will be discussed in the following questions. The companies will be referred to by their Ticker Symbols henceforth. Question 1 BEN The book value of the company’s liabilities and equity can be deduced from a number of online sources. The US Securities and Exchange Commission (2013) provided the company filings data whereby BEN’s Form 10q, dated 29/07/2013, showed the following (included on page 2 of this report). The book value of long-term debt is $1,252.1 million, and the book value of equity is $10,402.3 million. The schedule of outstanding debt shows that this figure includes $54.5 million of FHLB advances and $1197.6 million of Senior Notes at various effective interest rates. The notes on Stockholders Equity and Non- Redeemable Non-Controlling Interests reveal that Franklin Resources Inc Stockholders Equity totals $9779.8 million whilst the Non- Redeemable Non-Controlling Interests (previously referred to as minority interests) totals $622.5 million. FCX The book value of the company’s liabilities and equity can be deduced from a number of online sources. The US Securities...
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...company, is mulling on buying a plant from American Chemical Corp. American Chemical’s Collinsville plant makes sodium chlorate for the paper and pulp industry. Dixon will have to pay $12 million as purchase price for the plant. It may also pay $2.25 million to complete the laminate technology developed by the plant’s research and development staff, which is expected to improve the plant’s efficiency. Dixon already has transacted business with some of American Chemical’s major customers. Dixon, however, believes that the acquisition will enable it to widen product lines and penetrate the paper and pulp industry. Analysis To determine the economic feasibility of the acquisition, we can compute for the NPV of the acquisition, with or without the new technology. The NPV will show whether the Collinsville purchase will increase shareholder’s wealth or lead the company to insolvency. Under the net present value method, the weighted average cost of capital is used as the discount rate to calculate the present value of future cash inflows. Hence, for the case study, we will compute for the WACC, prepare projected cash flows then compute the NPV. Solution WACC The all-equity beta (β) of Dixon is 1.06. We assume that we could have a beta of 1.9 for the production of sodium chlorate, basing from the betas of other chemical firms. We could re-lever Dixon’s beta by using its 35% target capital structure. Using the formula, βlevered equity = βall-equity...
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...Target Corp (NYSE: TGT) PME 604 Project Financial Management Project Target Description Target is a general Merchandise store in the discounter genre. Its biggest competitor is Wal-Mart. Wal-Mart’s success is based on its differentiation in its market. The main differentiation is its distinct marketing strategy. Target’s distinction from Wal-Mart is the shopping experience. The stores are clean, have a slightly more sophisticated environment and shorter lines. As stated by the Gerald Storch Targets Vice Chairman It positioned itself as a “mass merchandiser of affordable chic goods”. A table listing the financial statement ratios listed above in which you list ratio figures for the most recent full year, prior year and industry average. Target 2013 | Target 2012 | Industry Average * | Current Ratio = 1.68 | Current Ratio = 1.15 | 2.0 | Inventory Turnover = 9.27 | Inventory Turnover = 8.23 | 3.6 | Debt to Equity = 1.91 | Debt to Equity = 1.95 | 3.3 | Net Profit Margin = 4.09% | Net Profit Margin = 4.19% | 3% | ROE = 18.1% | ROE = 18.5% | NA | P/E Ration as of 1/29/14 = 12.45 | NA | NA | * Industry Averages per http://www.retailowner.com Current Ratio The Current Ration formula = current assets/current liabilities For 2013, Current assets = 16,388, Current Liabilities =14,031, Current Ratio = 1.68 For 2012, Current assets = 16,449, Current Liabilities = 14,287, Current Ratio = 1.151 The current ratio is sometimes called the "liquidity...
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...Southern New Hampshire University Investigative Report The Capital Structure of Microsoft Corporation Zhang Yue Capital Budgeting & Financing, Fin 630 David Fehr June 3rd, 2013 Abstract At the first part, we are going to introduce Microsoft Corp. and how it works. Then, we try to figure out the WACC of Microsoft based on the data like income statements, balance sheets, cash flow statements, and some data searched from Yahoo! And Google Finance. At last, we are going to analyze and evaluate several terms of Microsoft. Compare Microsoft performance to Apple and Google, which are the most famous technology and Internet company, and then discuss with the whole technology market. Key Words: capital structure, WACC, ROE, leverage, liquidity, 1. Introduction 1.1 Company Background Microsoft Corporation is an American multinational software corporation headquartered in Redmond, Washington that develops, manufactures, licenses, and supports a wide range of products and services related to computing. This company was founded by Bill Gates and Paul Allen in 1975. With about four decades of development, now Microsoft is the world's largest software maker measured by revenues. It is also one of the world's most valuable companies. As of 2013, Microsoft is market dominant in both the PC operating system and office suite markets. The company also produces a wide range of other software for desktops and servers, and is active in areas including internet search...
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...is true regarding the beta coefficient? a. It is a measure of unsystematic risk b. A beta greater than one represents lower systematic risk than the market c. Generally speaking, the higher the beta the higher the expected return d. A beta of one indicates an asset is totally risk free e. The risk premium of an asset will increase if the beta of that asset decreases 4. Which of the following describe(s) a portfolio that plots below the security market line? a. The security is undervalued b. The security is providing a return that is higher than expected c. The security is overvalued d. The security’s beta is too low e. The security provides a return that exceeds the average return on the market 5. What is the expected return for the following stock? State Probability E(Ri) Average .55 .20 Recession .20 .10 Depression .25 -.20 a. .055 b. .080 c. .095 d. .105 e. .110 6. What is the risk premium if the risk-free rate is 5%? Note: E(R)=Risk Free Rate + Risk Premium State Probability E(Ri) Boom .15 .6 Good .50 .2 Recession .25 -.1 Depression .10 -.3...
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...Faustgen Murali Maddipatla Spencer Morse Topher Stephensen Hanjin Yu Table of Contents Company Introduction......................................................................................................................................... 1 Executive Summary .............................................................................................................................................. 1 Current Issues ......................................................................................................................................................... 1 Marketing Analysis ............................................................................................................................................... 2 The Target Segment .................................................................................................................................. 2 The Positioning Strategy ........................................................................................................................... 3 The Product Strategy................................................................................................................................. 3 The Promotion Strategy ............................................................................................................................ 4 The Distribution Strategy .......................................................................................................................... 4 The...
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...had the time to acquire the experience in optimizing its stores’ layout for effective leverage of seasonal products. All in all, most would say that Dollarama has done really well in its industry and climbed their way to being the dominant giant. Even so, retail analyst John Williams speculates that this dollar store has reached its mature phase of growth in the industry (Cowan, 2011). With even more new stores on the way, will Dollarama Inc.’s consistent growth be sustainable? Description The very first Dollarama was opened in 1992 in the city of Matane, Quebec. Founder and current CEO of Dollarama Inc., Lawrence (Larry) Rossy, at 70 years old, is a third generation retailer (Dollorama Inc., n.d.). Under the original name of Dollorama Capital Corporation, this company was incorporated in 2004 and went public in 2006. After merging with one of its holding company, it renamed itself as Dollarama Inc. in 2009 (Dollarama Inc., 2013, p. 6). Its current head office is in Montreal (Dollarama Inc., 2013, p. 6). Dollarama is the Canadian leader in value...
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