binding obligation that gives party the right to demand the performance of whatever promised * management (agency problem) – information asymmetry, act in self interest * debt Stewardship – compliance with delegated authority Agency Cost of equity Perquisite consumption – Manager give themselves more luxury than would seem reasonably from the principals point of view. E.g. corporate jets and huge officers with expensive art Risk aversion – managers and shareholders may prefer different
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1. Respond true or false to the following statements relating to the calculation and use of FCFE. A. The free cash flow to equity will generally be more volatile than dividends. B. The free cash flow to equity will always be higher than the dividends. C. The free cash flow to equity will always be higher than net income. D. The free cash flow to equity can never be negative. 2. Kimberly-Clark, a household product manufacturer, reported earnings per share of $3.20 in 1993 and paid dividends
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upon the effect of debt on weighted Average cost of capital (WACC) and Free Cash Flow (FCF). Debt owners have priority on cash flows over stockholder as their fixed claim amplifies risk of stockholder residual claim (Capital Structure Decisions 2010). As such cost of stock (rs) increases. A company can subtract interest expenses which reduce the amount of taxes paid and in turn allows greater cash flow for payments to shareholders and lessens after tax cost of debt. Increase in debt increases the
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earnings before interests and taxes (EBIT) was evaluated from the consolidated revenue and operating expenses. Corporate overhead Corporate overhead (assuming they are all fixed overhead) was not included in the calculation of EBIT since overhead costs are fixed and will be incurred in any case. They are not incremental to the project and should not be included in the calculation of incremental earnings (Berk & DeMarzo 2007). Net working capital From Liedtke’s projections of the balance sheet
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| Current Assets - Total | 51.2 | 32.1 | Net Fixed Assets | 19.6 | 14.9 | Other Assets | 6.9 | 3.8 | Intangibles | 22.2 | 46.1 | Investments and Advances | 0.1 | 3.1 | Total Assets | 100.0 | 100.0 | When it comes to Liablties and Equity, as we observed, Company A, has more amount of Liabilities compared to company B, and most of these liabilities are curent liabilities. Company A has a total current liabilities of 26.1 % while, Company B, has only 21.4%. (shown on Fig. 3) Figure
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financial plan for the development and production of the refrigerator. You will find useful information for the cost of production, financing, warranty costs, and cost of capital. To begin, great consideration should be given to energy costs because it affects buyer power. Companies are subject to extensive state and federal environmental regulations that may involve significant and increasing costs and may adversely affect the company. These regulations may increase the required amount of energy that
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and reductions in uncertainty are generally associated with lower capital costs and higher stock prices, other things being equal. The disadvantage is that such a policy might decrease corporate flexibility. However, the announced policy would possibly include elements of flexibility. On balance, it would appear desirable for directors to announce their policies. 15-2 While it is true that the cost of outside equity is higher than that of retained earnings, it is not neces-sarily irrational
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Amandeep Singh Kabli F-084 Section - B | Case: 1 Arnold Athletic Supplies Answer: Required Rate of return > =WACC Equity* cost of equity + debt*Interest (1-tax) WACC= -------------------------------------------------------------------------- Debt + equity Equity = Market value of the equity = No. of shares* market Value of the share = 1,2000,000 * 25 -------------------------------------------------
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assets. B. Real Assets- includes all assets used in production or sale of the firm’s products or services. They can be intangible (plant, equipment) or intangible (patents or trademarks). 8. A decision to expand into a new line of products, at a cost of 5 million, would be considered a capital budgeting decision. 9. When a corporation decides to issue long-term debt in order to pay for the acquisition of real assets, it has made a financing decision. 10. A manager’s compensation plan that offers
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questions of cost of capital for Midland Energy Resources, Inc. (Midland). Here are the results of our research: 1. Ms. Mortensen estimates Midland’s cost of capital for a variety of reasons including use for capital budgeting, financial accounting, performance assessments, stock repurchase estimations, and potential “M&A” opportunities. In addition, Midland relies on the cost of capital to deliver on the financial and investment policies set forth by the Board. Finally, the cost of capital
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