payable and accruals are sources of funding to be considered in the calculation of the WACC. This view is not correct because what is not provided by investors is not capital. Current liabilities arise on account of an operating relationship of the firm with its suppliers and employees. They are deducted when the investment requirement of the project is determined. Hence they should not be considered in calculating the WACC. Of course, current
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levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing financial leverage on WACC. As financial leverage increases, the WACC decreases until the optimal debt ratio is reached, after which, the WACC begins to rise. At this debt ratio, the value of Microsoft will be maximized. Our results indicate the optimal debt ratio for Microsoft is 37.5 percent. Introduction One of the most difficult
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MSc Corporate Finance Dr. Kirak Kim Before we start Main branches of finance Corporate Finance How do we value projects and (optimally) finance them? Asset Pricing How do we price securities more precisely? What’s the difference? Is it a Corporate Finance question or an Asset Pricing question? □ You are the manager of Intel Corp. You are reviewing the proposal for the new plant to be built in China. The new plant requires a large onetime investment but will provide significant
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Chapter 15 Capital Structure Decisions: Part II ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 15-1 Arbitrage is generally thought of as the process of buying an item in one market and simultaneously selling it at a higher price in another market and thus earning a riskless profit. MM broadened this concept. They show, under a set of assumptions, that personal debt can be used to cause the risk of two different stocks to be the same but the returns on the stocks can be different.
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The Weighted Average Cost of Capital Cost of Capital – the cost that a firm must pay for the capital it uses to finance new investments and investment projects. Capital comes from: 1) Debt 2) Preferred stock 3) Retained earnings 4) Common stock Alternatively: Cost of Capital to the firm is the equilibrium rate of return demanded by investors in the capital markets for securities in that risk class. So, it is the minimum rate of return required
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of the plant using the WACC method. Goodyear’s WACC is [pic] Therefore, [pic] A divestiture would be profitable if Goodyear received more than $47.6 million after tax. 18-5. Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%. a. What is Alcatel-Lucent’s WACC? b. If Alcatel-Lucent
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ELEMENTS OF MODERN FINANCE - MGCR-641 THE SUPER PROJECT Prepared By: Bogdan Enoiu Chris McLachlin J. Alejandro Noboa February 03, 2006 EXECUTIVE SUMMARY PROBLEMS 1. Is General Foods using the proper capital budgeting methods in evaluating their potential projects? 2. Should General Foods invest in the Super project? In evaluating the Super Project, what are the relevant cash flows to use? In particular: • Test market Expenses • Overhead Expenses • Erosion of Jell-O contribution margin
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6 so.. B(a) = B(e) / (1 + (1-tax) D/E) = 1.11 / (1+.56(2499/3596)) = .80 B = .8 * (1+.56(5394/3596)) = 1.47 Equity risk Prem = 7.43% (arithmetic average between 1926-1987) Cost of Equity = Rf + B(Risk Prem) = .0872 + 1.47(.0743) = 19.64% WACC = .4(.1964) + .6(.1125)(1-.44) = 11.64% i)What risk free rate and risk premium did you use to estimate the cost of equity? We used the risk free rate of a 10 year government bond (8.72%) to estimate the total risk free rate. We found the risk premium
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ΔWCR = -ΔWCR(math) ROA = Return on Assets WACC = Weighted average Cost of Capital CAPEX = Capital Expenditure (further??) ???DuPont analysis: ROE = Net Margin*AT*(Asset/Equity) Accounts Recievables DE=Total Debt/Equity ROE = NI/Equity TA=TCL+E (true?) or TA=TL+E??? L+E-E=TL L+E=E+TCL+LTD TCL=AP+STD TL=TCL+LTD??? AT = S/TA ROE = NI/A (theoretically not correct, but widely used) DSO = AR/(Sales/365) = AR/Sales*365 Calculate FCFF (example test part 2) | 2011 | 2012
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Introduction In this case Boeing faces a number of challenges in determiningthe viability of bringing forth the 7E7 aircraft series. Aircraft manufacturersbringing forth a new product has to take extra care since a miss in this assessment can place a company in a position to fail the result of huge cash outflows required. Boeing faced stiff competition from French based Airbus and had not brought forth a successful new product in recent years. Since the September 11th attacks travel had taken
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