POST-GRADUATE STUDENT RESEARCH PROJECT Estimating the Cost of Capital of CNX Nifty Prepared by Bhaswar Sarkar Student of PGDM Program of 2011-2013 Xavier Institute of Management, Bhubaneswar Supervised by Dr. Shridhar Kumar Dash Professor, Accounting and Finance Xavier Institute of Management, Bhubaneswar March 2013 Estimating the Cost of Capital of CNX Nifty Prepared by Bhaswar Sarkar1 Abstract This paper calculates the cost of capital of the CNX Nifty 50 Stock Index. It explores
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firm’s after-tax return on capital and its cost of capital. Stewart states that the earnings, earnings per share, and earnings growth are misleading measures of corporate performance, and the best practical periodic performance measure is economic value-added. The formula to measure EVA is: EVA= NOPAT – (invested Capital x WACC). EVA is a dollar amount and if that amount is positive, the company can earn more net operating profit after tax than the cost of capital used to generate the profit.
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its stock holders. Wrigley has virtually no debt. By pressuring directors and managers to adopt more efficient policies, she hopes to reap an investment gain. If Wrigley were to change the capital structure of the company by increasing its debt/equity ratio, significant financial value would be created from the debt tax shelter. This strategy created $156 million to be invested for shareholder gain. The value of this extra cash flow is shown as the present value of perpetuity at $1.2 billion.
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Management Summary 2 Active Investor Strategy 2 Effects of $3 Billion in New Debt for Dividend or Stock Repurchase 2 a. Outstanding Shares 2 b. Book Value of Equity 2 c. Price per Share 3 d. Earnings per Share 3 e. Debt Interest Coverage Rations and Financial Flexibility 3 f. Outstanding Shares 3 Wrigley’s Current Weighted Average Cost of Capital (WACC) 3 Debt Proceeds to Pay a Dividend or Repurchase Shares 4 Wrigley’s Recapitalization 4 Should Wrigley’s directors undertake the recapitalization
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Carter is considering opening a music store. He wants to estimate the number of CDs he must sell to break even. The CDs will be sold for $13.98 each, variable operating costs are $10.48 per CD, and annual fixed operating costs are $73,500. a. Find the operating breakeven point in number of CDs. b. Calculate the total operating costs at the
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for the years 2007, 2008, 2009, 2010 and 2011 respectively. The Cost of Debt and the Cost of Equity The next step was to determine the coast of debt, using the assumptions made by Mr. Liedtke which outlines a tax rate of 40%, the cost of debt of 6% for a leverage of 20% debt. The after-tax cost of debt (RD) was determined to be 3.6% [using RD =(R*(1-Tax Rate), where RD =after rate cost of debt, R= cost of debt] The cost equity estimated using the CAPM approach, Surfside Footwear was selected
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company’s method enables the corporation to only invest in profitable projects, which increase shareholder value. Thirdly, in financing area, Marriott makes the most of its capital structure, especially optimizing the use of debt, intending to minimize the cost of capital while focusing on its ability to service its debt. Lastly, in capital market, by repurchasing undervalued shares, Marriot would have an expected increase in share price, which would increase existing shareholders’ wealth. In addition, this
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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 repurchase
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The MM conclusions were based on a number of assumptions, and in the real world, those assumptions are not correct. Investors cannot necessarily borrow at the same rate as corporations, interest rates increase with the amount borrowed, bankruptcy costs do exist, and so on. Moreover, corporations are more likely to use cash flows to service their own debt than they are to pay dividends in bad times to enable stockholders to service “homemade” leverage debts, which could result in additional risk
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Cheat Sheet Assets are valuable resources owned by the entity. LIABILITIES AND EQUITY sources of funds that provided the entity’s assets. Liabilities are the entity’s obligations to outside parties DUAL-ASPECT CONCEPT Assets = Liabilities + Equity MONEY-MEASUREMENT CONCEPT money-measurement concept. By converting different facts to monetary amounts, we can deal with them arithmetically The money-measurement concept states that accounting reports only those facts that can
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