Chapter 11 The Cost of Capital Sources of Capital Component Costs WACC Adjusting for Flotation Costs Adjusting for Risk 11-1 What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock 11-2 Calculating the Weighted Average Cost of Capital WACC = wdrd(1 – T) + wprp + wcrs The w’s refer to the firm’s capital structure weights. The r’s refer to the cost of each component. 11-3 Should our
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goals, Midland must calculate an appropriate cost of capital that will allow reasonable valuations of their strategies. In funding overseas growth, Midland must use its cost of capital to analyze, evaluate, and convert foreign cash flows. In evaluating value-adding projects, the cost of capital must be used to discount project cash flows. To optimize its capital structure, the company must continuously evaluate its ideal borrowing based on its inherent cost. Lastly, when deciding when and how to
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outlay required to implement a project. B. determination of changes in NPV estimates when what-if questions are posed. C. isolation of the effect that a single variable has on the NPV of a project. D. separation of a project's sunk costs from its opportunity costs. E. analysis of the effects that a project's terminal cash flows has on the project's NPV. 2. By definition, which one of the following must equal zero at the cash break-even point? A. net present value B. internal rate of return
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Energy Resources Inc.: Cost Of Capital Introduction Midland Energy Resources have a senior vice president, Janet Mortension, of project finance. She was preparing her annual cost of capital for midland as well as for each of its following three divisions: * Exploration & production (E&P) * Refining & Marketing (R&M) * Petrochemicals Midland was a global company with operations in oil and gas. Midland corporate treasury had began analysis and preparation of annual cost of capital for the corporation
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Executive Summary: Nike, Inc. Cost of Capital Mid-year 2001, Nike, Inc. revealed their strategy to rejuvenate the company image, increase stagnant earnings, and to take back market share. By July, the share price for Nike had declined significantly to $42.09. During Nike’s analysts’ meeting, management stated their goals of 8% to 10% in revenue-growth and over 15% in earnings-growth. Analysts’ reviews were mixed on the new targets and the actual growth potential for Nike, so Kimi Ford and her
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refers to the proportion of debt and equity being used to finance a firm’s assets: Assets = Debt + Equity Capital Structure - In this lesson we will examine the notion that capital structure affects the value of the firm. That is, the value of the firm might change with the amount of debt that is present. - This would occur because the cost of financing with debt (AtRd) is normally lower than the cost of financing with equity (Rs), which means the WACC for
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types: 1.fixed interest or Debt 2.Shares or Equity 3. Derivative Securities (Futures, Options) Fixed interest: 1.Payments fixed or determined by a formula 2. Money market debt: short, term, highly marketable(市场的), usually low credit risk 3. Capital market debt: long term bonds, can be safe or risky 4.Subject to Interest Rate movements (Yield Curve) and Credit Risk Equity Securities: 1.ownership of a corporate entity 2.secondary markets liquid and low cost 3.Residual claim on assets after debt 4. Limited
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2012 Net Operating Profit After Tax | 2012 Net Operating Assets | 2011 Net Operating Assets | 2012 Stockholders’ Equity | 2011 Stockholder’s Equity | Intel | INTC | $53,341 | $11,005 | $10,857 | $42,065 | $37,843 | $51,203 | $45,911 | s a. Compute the 2012 return on equity (ROE) and the 2012 return on net operating assets (RNOA). ROE = Net Income/Average stockholder’s Equity = 11,005/[(51,203 + 45,911)/2] = 11,005/48,557 = 22.66% RNOA = Net Operating Profit
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American-based company specializing in snack food industry. Its competitive advantages mainly base on conservative management strategies, cost efficiency, high quality products as well as solid regional position. Despite stable growth over years, one big concern raised among company’s shareholders as well as financial analysts are its capital structure. As HCSF is all-equity funding, many perceived that the company has more potential to increase its financial performance but leverage in the means of introducing
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An investor adjusts the investment account for the amortization of any difference between cost and book value under the a. cost method. b. complete equity method. c. partial equity method. d. complete and partial equity methods. 2. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to a. Dividend Income. b. Dividends Declared – S Company. c. Equity in Subsidiary Income. d. Retained Earnings – S Company. 3. On the consolidated statement
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