Capital Structure Decisions: The Basics Capital structure theory Overview of capital structure effects Business versus financial risk The effect of debt on returns Basic Definitions • • • • • V = value of business FCF = free cash flow WACC = weighted average cost of capital rs and rd are costs of stock and debt re and wd are percentages of the business that are financed with stock and debt. • VU = value of unleveraged business • VL = value of leveraged business Capital Structure Theory
Words: 1483 - Pages: 6
Some suggested answers for the Timken case: 1) Synergies are likely to come mostly from expanding the economies of “scope”. The quote on p.1 is revealing: “… the two companies shared many of the same customers but had few products in common, (therefore) customers would surely appreciate that Timken’s sales representatives could meet more of their needs.” Further on p.8: “… the combined companies… would have many complementary products… (and) only a 5% overlap in their product offerings… (while)
Words: 1589 - Pages: 7
and the company cost of capital. Design/methodology/approach – The capital asset pricing model is used to estimate the company’s cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost
Words: 8393 - Pages: 34
ELEMENTS OF MODERN FINANCE - MGCR-641 THE SUPER PROJECT 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 • Allocation of charges for the use of excess agglomerator capacity OPTIONS
Words: 2562 - Pages: 11
Road King Trucks Case Analysis Abstract This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big
Words: 1118 - Pages: 5
its estimate of its cost of capital? Does this make sense? ...... 3 3. What is the weighted average cost of capital for Marriott Corporation? ..................... 4 4. What type of investments would you value using Marriott’s WACC? ........................ 6 5. If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7 6. What is the cost
Words: 4681 - Pages: 19
integrated development process rather than passively own it. For example, Marriott developed more than $1 billion worth of hotel properties, making it one of the 10 largest commercial real estate developers in the US, which partly contributed to its high growth rate. This reduces the balance sheet assets and thus increase return on assets (ROA), which is a key indicator of profitability. Secondly, in investment area, Marriott uses separate WACC for different division of project to value each opportunity
Words: 1832 - Pages: 8
Telecommunication Services Inc. (TSI) is a company that was founded in nothern region back in 1994 by the Adamson’s family. The company provide an address and phone number for small companies which may not have a full-time office staff but still need to respond rapidly to the inquiries from their customers. The company soon expanding due to the development of IT industry and due to the numerous demand for its services. Due to those factors, additional to the emerging growth industry for telecommunication
Words: 2174 - Pages: 9
#3 After we calculated the weighted average costs of capital (WACC) for each project one can clearly see that the costs of capital are increasing. The increase in costs differs though from project to project. The methodology used assumes that every project has got a different business-risk specific score which then leads to different adjustments on the cost of capital. For example the project “Andres” which is located in the Dominican Republic has got, according to the score, the highest risk. Having
Words: 326 - Pages: 2
projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model. (Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. ) According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and
Words: 1388 - Pages: 6
