QUESTIONS FOR THE OVERALL ASSIGNMENT 1. What is the best way to estimate the company and divisions’ cost of capital? Answer: The best way to estimate the cost of capital is by using the CAPM (Capital Asset Pricing Model) where the Weighted-Average Cost of Capital (rwacc) is given by the formula Where, D is the market value of the net debt E is the market value of the total equity V is the total market value of debt and equity = D + E T is the corporate tax rate rd is the appropriately
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0BAFI Business Finance Exam Solutions Semester 3 2010 Section B Q. 1 Explain in simple terms what you would need to know and how you would go about determining the interest and principal components of a loan repayment. To determine the interest and principal components of a loan repayment you would need to know the following: Present value (PV) – the amount outstanding on the loan, r – the discount or interest rate applicable to the loan, n – the number of payments to be made on the loan
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After evaluating Hertz, we recommend that Carlyle Group purchase Hertz for at least $2.3 billion. If they want to achieve a 20% return, they should offer $5.2 billion. A higher offer price is recommended due to the competitive nature of the dual-track process. The dual-track process has created a rather interesting environment for potential investors. Not only are investors competing with each other, but if the case that a deal is not worked out then Ford has made provisions for the company to be
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This is why it is often said that debt is a two-edged sword: too much is bad but so is too little. 2. Why is CS important? It directly impacts the cost of capital and therefore directly affects the value and profitability of the company. For example, at one time Hershey Foods determined that its cost of capital was 13%, significantly more than the cost of capital of its competitors, which put Hershey at a significant competitive disadvantage. It might have even put Hershey out of business if
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debt on a company's earnings before interest and taxes In this simplified view, it can be seen that without taxes and bankruptcy costs, the WACC should remain constant with changes in the company's capital structure. For example, no matter how the firm borrows, there will be no tax benefit from interest payments and thus no changes/benefits to the WACC. Additionally, since there are no changes/benefits from increases in debt, the capital structure does not influence a company's stock price, and
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because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The cash flow valuation model is Free Cash Flow = Net Income + Depreciation + Deferred Taxes – Dividends Paid- Capital Expenditures C. D. E. 1. F
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borrowing on WACC (traditional view)- traditional view of capital structure imply that the benefit of borrowing outweigh not borrowing, low cost of debt with its tax deductible advantage will effect the WACC to fall as borrowing increase. However, as the gearing increase because of bankruptcy risk and cost of equity rises, the WACC will increase as well, traditional view of the effect of borrowing on WACC shown on the graph- Cost of capital Ke WACC Minimum WACC
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WACC A company has different sources of finance, namely common stock, retained earnings, preferred stock and debt. Weighted average cost of capital (WACC) is the average after tax cost of all the sources. It is calculated by multiplying the cost of each source of finance by the relevant weight and summing the products up. Formula For a company which has two sources of finance, namely equity and debt, WACC is calculated using the following formula: Cost of equity is calculated using different
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| FIN-516 Week 2 - MINI – CASE ASSIGNMENT | Deere & Company (NYSE:DE) | | A fundamental Analysis into the financial performance of Deer and Company (NYSE :DE ), better known as JOHN DEERE & CO. | FIN-516 – WEEK 2 – MINI – CASE ASSIGNMENT Deere & Company (NYSE:DE) 1. What is the name of the company? What is the industry sector? Deere & Company also more commonly known as John Deere, along with its subsidiaries, operates in three segments: agriculture and
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Instructor Guide CORPORATE FINANCE COURSE NUMBER: MBA591 [pic] Jones International University®, Ltd. 1.800.811.JONES (5663) http://www.jonesinternational.edu ©2008 Jones International University®, Ltd. All rights reserved. 9697 East Mineral Avenue, Englewood, Colorado 80112, USA This workbook and all accompanying audio-visual material, manuals and software (collectively, the "Materials") are
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