estimating the cost of equity for Crab Inc., a non-listed chain of restaurants specializing in crab meals. Crab has a debt-to-equity ratio of 2 and pays an interest rate of 5% on its debt. Crab’s operations are highly similar to those of the publicly traded Lobster Inc. and Shrimp Inc., which specialize in lobster meals and shrimp meals, respectively. Assume that none of these companies pays taxes. The risk free rate is 2% and the expected return on the market is 10%. Lobster has a debt-to equity ratio of
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The Cost of Capital for Goff Computer, Inc. BUS650: Managerial Finance (MAH1209A) Dr Charles Smith March 18, 2012. The Cost of Capital for Goff Computer, Inc.: 1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) reports to the SEC detailing their financial operations over the previous quarter or year, respectively. These corporate fillings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site, follow the “Search for Company Filings”
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free cash flow projections and terminal value by an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of equity for levered DCF). In an unlevered DCF (the more common approach) this will yield the company’s enterprise value (aka firm and transaction value), from which we need to subtract net debt to arrive at equity value. Divide equity value by diluted shares outstanding to arrive at equity value per share. * Relative valuation (Multiples) - The second
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company’s cost of capital? A corporate cost of capital can be specifically defined as the opportunity cost of all capital invested in the enterprise. Opportunity cost refers to what is given up as a consequence of a decision to use a scarce resource, capital invested refers to the total amount of cash invested into a business, and this includes both debt and equity components used in the investment in the enterprise. A three step process is used to calculate a company’s weighted average cost of capital
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page 28) Cost of Equity * Can be measured with: * CAPM: risk measured relative to a single market factor * Arbitrage pricing model: cost of equity is determined by the sensitivity to multiple unspecified economic factors * Multiple factor model: sensitivity to macroeconomic variables is used to measure risk i. Estimate Risk-Free Rate ii. Estimate Risk Premium iii. Estimate Beta * Unlevered beta: the beta a company would have if it were all equity financed
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20% to 50% of stock and has significant influence but |On BS at historical cost plus |N/A |Realized loss on | |not control of the corporation |share of earnings since | |IS, new basis on | | |acquisition less dividends | |BS | |Use Equity Method |received (amortization
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paper, we confront both factors. We argue that financial service firms are best valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends, rather than free cash flow to equity. The two key numbers that drive value are the cost of equity, which will be a function of the risk that emanates from the firm’s investments, and the return on equity, which is determined both by the company’s business choices as well as regulatory restrictions
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preference of the investor invests the equity mainly in domestic market rather than invest in the foreign market even though they can gain substantial benefit due to international diversification. The term of “equity home bias puzzle” is referring to the concept of holding extremely large proportion of domestic equity compare to foreign equity. This phenomenon also exists in other countries, which the investor seems to ignore the opportunity of investing in foreign equity and focus on local market. This
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commercial strategy, find out the production plants. At the end of 2010 the business plan is ready and the company has already participated to an exhibition where many potential customers said to be very interested to the project. The problem: A private equity institution gets in touch with the company in order to buy 30% of the company buying new shares. The company wonders about the value of such shares, that is why the company asks a consultant to provide an estimation. The business idea: To manufacture
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determine the “size” of banks. 3. Instead of traditional metrics like revenue and EBITDA, you list the metrics and multiples that are relevant to a bank: EPS, Return on Equity (ROE), Book Value (BV), P / E, P / BV, and so on. Operating Metric Equity Value Book Value (BV) How to Calculate It Shares Outstanding * Share Price Shareholders’ Equity(1) What It Means How much are we worth? How much are we worth according to our assets rather than the market? How much are we worth to everyone except preferred shareholders
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