Team 14 Constantine Brocoum Courtney Delia Stephanie Doherty David Dubois Radu Oprea October 15th, 2009 Contents Objectives 1 Management Summary 1 Cost of Equity 1 Equity Market Risk Premium 1 Beta 2 Risk Free Rate 2 Capital Structure Weights 2 Boeing 7E7 Project Evaluation 4 Circumstances for an economically attractive project 4 Market Demand 4 Market Share 4 Sensitivity Analysis
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mix of debt and equity on the balance sheet. The basic capital structure question is: How much debt is right for this company? Contrary to what your momma may have taught you, according to the so-called finance experts too little debt may be just as costly as too much debt, because debt financing is usually the cheapest source. This is why it is often said that debt is a two-edged sword: too much is bad but so is too little. 2. Why is CS important? It directly impacts the cost of capital and
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Managerial Behavior, Agency Costs and Ownership Structure Michael C. Jensen Harvard Business School MJensen@hbs.edu And William H. Meckling University of Rochester Abstract This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence
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3, 4, 7 | 1 | 2. Bond amortization. | 8, 9 | 1, 2, 3 | 3, 4, 5 | 1, 2, 3 | | 3. Equity securities. | 1, 12, 16 | | 1 | | 6 | (a) Available-for-sale. | 7, 10, 11, 15, 21 | 5, 8 | 6, 8, 9, 11, 12, 16, 19, 20 | 3, 5, 6, 8, 9, 10, 11, 12 | 1, 2, 3 | (b) Trading. | 6, 7, 8, 10, 14, 15, 21 | 6 | 6, 7, 14, 15, 19, 20 | 6, 8 | 1, 3 | (c) Equity method. | 16, 17, 18, 19, 20 | 7 | 12, 13, 16, 17 | 8 | 4, 5 | 4. Comprehensive income
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[pic] Faculty Communication, Media & Music Exam front sheet |Name exam |Financial Management | |Code exam |2410MJ123A | |Date |January 20th 2011 | |Duration
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refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest to 17.6% which points to a WACC of 9.45%. If the firm undertook a more substantial amount of debt, the cost of the debt would not continue to be 7.75% so it is beneficial for HPL
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holders happy may not be the best strategy for growth 2) How does Marriott use its estimate of its cost of capital? Does this make sense? Marriott uses a Debt capacity and the cost of Debt: with a risk free rate, the floating and the fixed debt, its separates the divisions, uses A-rated debt for the spread, and debt / equity. all of which are acceptable. Marriott uses the Cost of Equity: with CAPM and a constant beta. The Capm is acceptable, but the constant beta isn’t the best option
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GRENNELL FARM Income Statements For the Year Ended December 31, 2009 Method: Sales Collection Production Sales $ 522,000 $ 462,400 $ 614,100 Less: Cost of goods sold Beginning inventory $ - $ - $ - Production $ 107,730 $ 107,730 $ 107,730 Less: Ending inventory $ 15,390 $ 25,650 $ - Cost of goods sold $ 92,340 $ 82,080 $ 107,730 Gross margin $ 429,660 $ 380,320 $ 506,370 Less: Other expenses $ 183,000 $ 183,000 $ 183,000 Net Income $ 246,660 $ 197,320 $ 323
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recapitalizations; and, management and leveraged buyouts. When mezzanine debt is used in conjunction with senior debt it reduces the amount of equity required in the business. As equity is the most expensive form of capital, it is most cost effective to create a capital structure that secures the most funding, offers the lowest cost of capital, and maximizes return on equity. Mezzanine debt has been around for over 30 years, however its use in Western Canada and the Pacific Northwest is relatively new and
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4. [pic] 6. [pic] 7. The value of retained earnings is a part of the shareholder’s equity, and is reflected in the market value of equity. It should be included in the calculating the market value of equity. 8. All investors will receive their required rate of return. 9. As the WACC decreases due to the cost advantage of debt, the present value of the cash flows generated by the project will increase, consequently the NPV of the project
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