Capital Structure Decisions: The Basics Capital structure theory Overview of capital structure effects Business versus financial risk The effect of debt on returns Basic Definitions • • • • • V = value of business FCF = free cash flow WACC = weighted average cost of capital rs and rd are costs of stock and debt re and wd are percentages of the business that are financed with stock and debt. • VU = value of unleveraged business • VL = value of leveraged business Capital Structure Theory
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Free Cash Flow Analysis 7 Appendix 2: Historical Free Cash Flow Analysis 8 Appendix 3: Growth Estimations 9 Appendix 4: 2012 Operating Expense Growth Estimation 10 Appendix 5: Income Taxes 11 Appendix 6 11 Working Capital, Depreciation and Amortization, Capital Expenditure Estimation 11 Appendix 6 Part II: Estimations Summary 12 Appendix 7: Free Cash Flow Estimation Analysis (in mln. €) 13 Appendix 8: WACC Calculation 14 Appendix 9: Equity Evaluation 16 Appendix 10: Sensitivity
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13/3/2013 Nike, Inc. Cost of Capital 1 Discussion Questions • What is the WACC and why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers? • Do you agree with Joanna Cohen’s WACC calculation? Why or why not? If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. What mistakes did Joanna Cohen make in her analysis? Which method is best for calculating
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Question 1.1. (TCO A) In the United States, which of the following types of organization has the greatest revenue in total? (Points : 5) | Sole proprietorship C corporation S corporation Limited partnership | Question 2.2. (TCO A) The one thing that makes a corporation different from the other forms of business ownership is (Points : 5) | legally, the corporation is the same as its owners. it requires all owners to share liability equally
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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
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expected future cash flows to be generated by the assets, discounted at the company’s weighted average cost of capital (WACC). From this it can be seen that the WACC has a direct impact on the value of a business. (Johannes and Dhanraj, 2007). The choice between debt and equity aims to find the right capital structure that will maximize stockholder wealth. Debt policy and equity ownership structure “matter” and the way in which they matter differs between firms with many and firms with few positive net
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NIKE INC. Cost of capital estimation | GROUP FINN- 400 | NIKE INC. Cost of capital estimation | GROUP FINN- 400 | Background: The case is built around the stock buy decision of Nike Incorporation by the North-Point Large Cap fund. The mutual fund manager, Kimi Ford is evaluating Nike’s financial performance. Nike’s revenues had stabilized at $9 Billion since 1997 and Net Income had fallen from $800 Million to about $580 Million. In sum, Nike was experiencing
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Bed Bath & Beyond “The Capital Structure Decision” Advanced Corporate Finance Everaars, Tim 6160492 Groenenberg, Erik 6178944 Kruitwagen, Max 6359744 Veldkamp, Max 6270581 1. What is wrong with building up cash? Provide (at least two) reasons in favor and against keeping cash in the firm. You need a cash reserve for bad economic times. If business is not going very well, you’re making losses, you need some
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POST GRADUATE PROGRAMME IN MANAGEMENT AY 2015-16 TERM: III TITLE OF THE COURSE: FINANCE II CREDITS: 4 Name of the Faculty Arnab Bhattacharya Gaurav Singh Chauhan Kousik Guhathakurta Radha M. Ladkani Faculty Block/ Room No. J BLOCK C-102 A-106 J BLOCK Email Telephone Number arnabb@iimidr.ac.in gauravs@iimidr.ac.in kousikg@iimidr.ac.in; radhal@iimidr.ac.in; 0731-2439589 0731-2439592 0731-2439518 0731-2439698 COURSE DESCRIPTION The second core course in Finance
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between Inside Owner/Managers and outside owners 3. Conflicts between managers and shareholders Conflicts between stockholders and creditors Conflict between shareholders and creditors is common for the company which use debt capital to form an optimum capital structure. As mentioned earlier, agency relation exist when one party works as an agent of the principal. In an organization management works as a agent of owner or share holders. When managers work for the company they can be influenced
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