Midland's cost of capital 1. I choose the rate of 30-year U.S. Treasury bonds in 2007 (4.98%) as the risk free rate in the 2007 WACC calculations. The reason is that majority of large firms and financial analysts report using long-term yields for bonds to determine the risk-free rate. Rf=0.0498 2. Cost of debt, which is determined by adding the spread to Treasury (1.62%) to the rate of 30-year treasury bonds in 2007. Rd=0.0498+0.0162=0.066 3. Cost of equity, the EMRP (5%) and D/E (59
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Chapter 3 Problem (3-5) p. 208-209 Chapter 4 Problem (4-5) p. 256 (3-5) Leases, Pensions, Receivables Securitization Westfield Capital Mgmt Co.'s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry's Dpt. Stores (JDS) or Miller Stores (MLS). Selected financial data for both companies follow: Selected Financial Data as of March 31
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Solvency: ability to have cash to buy fixed assets and inventory (outflow cash) The balance sheet Equity= assets - liabilities current assets cash inventories Financial statements: Balance sheet current liabilities ! ! ! long-term liabilities equipment plant ! ! total shareholders equity stock ! long-term debt ! accounts payable ! acc receivable fixed assets retained earnings ! total assets x total liabilities + equity x Figure 2 example of a balance sheet Financial snapshot: 1 moment in time
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ROE = net income/ shareholder’s equity 2. ROE = ROA * financial leverage 3. ROE = (net income/ assets) * financial leverage 4. ROE = ROA* assets/shareholder’s equity 5. ROE = (net income/assets)*(assets/shareholder’s equity) 6. ROE = (NOPAT/equity) – (net interest expense after tax/equity) 7. ROE = (NOPAT/net assets)*(net assets )-( net interest expense after tax/net debt)* (net debt/ equity) 8. ROE =(NOPAT/net assets)*(1+ net debt/equity)-( net interest expense after tax/net
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(including employee benefits), Equity And off balance sheet transactions Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3-3 Overview of Chapter Companies operations are financed by various sources: • Liabilities • Capital (Stockholders’ Equity) • Off balance sheet transactions 3-4 Companies’ Financing Sources Liabilities Capital (Stockholders’ Equity) Off balance sheet transactions
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Marketable Securities) Total Assets Cash and Marketable Securities to Total Assets (Cash + Marketable Securities) Total Assets Days’ Payable Period 365 Cost of Goods Sold/Accounts Payable Days’ Payable Period 365 Cost of Goods Sold/Accounts Payable Accounts Payable Turnover Cost of Goods Sold Accounts Payable Accounts Payable Turnover Cost of Goods Sold Accounts Payable Current Ratio Current Assets Current Liabilities Current Ratio Current Assets Current Liabilities Interest Coverage
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given quarter. Acid-test ratio. See quick ratio. Activity-based costing (ABC). An approach to cost accounting that focuses on the activities or cost drivers required to produce each product or provide each service. ABC assumes that most overhead costs are related to activities within the firm and that they vary with respect to the drivers of those activities. Allocation. The process of spreading costs from one expense category to several others, typically based on usage. For example, such corporate
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on the following: 1- Do you agree with the way the company computes its weighted average cost of capital. Why or why not? Be specific? How would you compute the WACC? Use RF= 8.08%, Beta of equity for Pioneer = 0.8 and RM-RF = 7% I disagree with the way the company computes it’s WACC. They are assuming a cost of equity based on the current earnings yield on the stock to raise new equity. This does not make sense as the share price can fluctuate and vary based on multiple market factors
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that equity will not increase by the same percentage as the other assets. If every other item on the income statement and balance sheet increases by 10 percent, the pro forma income statement and balance sheet will look like this: Pro forma income statement Pro forma balance sheet Sales $ 17,600 Assets $ 9,790 Debt $ 5,610 Costs 13,750 Equity 4,180 Net income $ 3,850 Total $ 9,790 Total $ 9,790 In order for the balance sheet to balance, equity must be: Equity = Total
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COGS but not div)] Equity in Investee Inc (net loss) Equity in Investee Inc Investment in Investee | Record amortize excess n impair goodwill Equity in Investee Inc impair goodwill + amortization exp Investment in Investee | Transfer stuff (when not consolidation) UPSTREAM SALE Equity in Investee Inc … Investment in Investee … = (Remain part)*(gross profit of sale/sale price*100%)*(% acquisition) gross profit = sale price - cost | Investment in
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