The WACC Case (Week 5) Question 1 In order to estimate the equity betas of each company, first, we have to calculate the monthly rates of returns: Rate of returni = (〖Price〗_i- 〖Price〗_(i-1))/〖Price〗_(i-1) Then, we can estimate the equity betas as follows: βe = (Cov (R_p, R_Mkt))/(Var(R_Mkt)) ,where Rp is the return of a specific stock (Unilever, Royal Dutch Shell, Randstad) and RMkt is the return of the market (AEX Index). We used Excel to compute the covariance (COVAR) and the variance
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Capital structure Issues: What is capital structure? Why is it important? What are the sources of capital available to a company? What is business risk and financial risk? What are the relative costs of debt and equity? What are the main theories of capital structure? Is there an optimal capital structure? 1 What is “Capital Structure”? Definition The capital structure of a firm is the mix of different securities issued by the firm to finance its operations. Securities
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.............................................................. Return and Risk: The Capital-Asset-Pricing Model (CAPM) .................................. An Alternative View of Risk and Return: The Arbitrage Pricing Theory ............... Risk, Cost of Capital, and Capital Budgeting
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Market efficiency and equity—Unit 2AECO A range of teaching and learning materials covering the concepts of Market efficiency and equity for the 2AECO unit and some applications of these concepts: 4.1 4.2 4.3 4.4 4.5 4.6 4.7 The Sundance film festival—A case study with suggested answers PowerPoint slides—Efficiency and equity, concepts and applications PowerPoint companion—Efficiency and equity, concepts and applications Extension activities—The concepts of efficiency and equity Extension activities
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COST OF CAPITAL The Problem On January 1, 1997 Bunky's Burgers, Inc. is planning its yearly capital budget and is faced with a list of 5 potential independent proposals: PROJECT | OUTLAY | IRR | A | 8,000,000 | 14.0% | B | 8,000,000 | 21.0% | C | 10,000,000 | 19.0% | D | 12,000,000 | 13.5% | E | 12,000,000 | 16.0% | The firm's capital structure relations shown below are considered optimal and will be maintained: Debt | $120,000,000 | Preferred Stock | 20,000,000 | Common
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Liabilities Net sales Average accounts receivable Cost of goods sold Average inventory 365 365 Net Sales Average total assets Total liabilities Total assets Total equity Total assets Total liabilities Total equity Income before interest expense and income taxes Interest Expense Net Income Net Sales Cost of goods sold Net Sales Net Income Average total assets Net income Preferred dividents Average common stockholders equity Net Sales Measure of Short‐term debt‐paying ability (2:1
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Equity Valuation and Analysis – Lundholm & Sloan Chapter 1 - Introduction Focus of the Book – Equity Valuation Business Activities Operating Investing Financing Equity Valuation Theory Dividend Discounting Model o The value of an equity security is equal to the present value of the future cash flows that it will generate o Where Value0 = Value of equity at time 0 Cash Dividendt = expected amount of cash dividends to be paid in period t r = discount rate (cost of capital) Chapter 1
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Current Ratio A liquidity ratio that measures a company's ability to pay short-term obligations. The Current Ratio formula is: [pic] The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if
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Midterm exam: 12-15 multiple choices, 6 short problems (like goodwill allocation and E&R), chapter 6 only the land * Chapter 1: equity method of accounting, recording a acquisition (look for whether or not we are purchasing equity or just assets and liabilities, is there any subsidiary continuing) * Chapter 2: acquisition method, review key; intangible, goodwill (amortizable, impairment); Acquisition has contingent consideration (treated as part of consideration); in process R&D (treat
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debt, equity, or retained earnings. The mixture of debt and equity is the company’s capital structure. There are four factors that influence capital structure; business risk, tax position, financial flexibility, managers, growth rate, and market conditions. Management’s decisions concerning capital structure should be geared toward maximizing the intrinsic value of the company. This value is the present value of its expected future free cash flows (FCF) discounted at its weighted average cost of capital
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