weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need for students to estimate a segment WACC draws out their abilities to critique
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for each period varies. Since each period has different standard error, it will be better to take the weighted average of the data, then EMRP is approximately 5.9% or lets say 6.0%. Comparing to the EMRP that Midland would use in the calculation of WACC which is 5%, the historical data reflects a higher EMRP. But from the market risk premium survey results, we see that finance professors, CFOs and fund managers advocate a lower rate on risk premium. Because these people have better understanding in
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conclude, the improper risk adjustment leads to misallocation of resources which will bring about lower firm value. b. Explain how the single hurdle rate currently used by Northern Forest Products can change the risk structure of the company. For example, think about what would happen if the Plastic Products Division received a disproportionately high level of funding because their returns exceed the company hurdle rates
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used to finance long-term assets. * Preferred Stock * Equity: * Common stock * Retained Earnings Step 1: D + PS +E = V or value of firm Step 2: D/V; PS/V; and E/V as representation of capital structure. Cost of Capital: WACC=DV×Rd×1-T+PSV×Rp+EV×Re Capital Structure: * Book Value Capital Structure * Market Value Capital Structure Market Value Capital Structure * Market Value of
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for capital employed. Issues: Did Pioneer compute WACC correctly and if not what did they do wrong? Compute your own. How should the company determine a minimum rate of return: by (1) a single cutoff rate based on the company's overall WACC or (2) a system of multiple cutoff rates that reflect the risk-profit characteristics of the several businesses? Analysis: Pioneer Petroleum Corporation did not calculate the WACC correctly. Starting with the cost of debt, the formula is
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rP os t UV0112 Rev. Feb. 24, 2009 METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS op yo This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and comparable transaction multiples. Discounted-Cash-Flow Method Overview
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value of the associated financing decisions should be generally useful for the financial manager. 2 A Comparison of WACC and APV • Features/advantages of WACC. 1. WACC accounts for tax shield benefit of interest in discount rate. 2. WACC is widely adopted by practitioners and is easy to use. 3. WACC is applicable when D/E remains essentially constant through project life. 4. WACC is most appropriate when the project is “typical” of the firms traditional businesses (i.e., same risk), or “scale enhancing”
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Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Giving a calculated WAAC of 15.44% for the commercial division of Boeing, the project is feasible and profitable. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the
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capital structure can affect the WACC and FCF. Capital structure presents how a company finance its operations. It is expressed as percentage of debt, preferred stock, common equity used in financing a company's operations.[1] WACC calculates a company's “cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.”[2] “WACC depends on percentage of debt and
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gathered together here (and in some cases repeated) the derivations of some of the formulas used in Chapter 19. We cover five topics: 1. Deriving the WACC formula. 2. Does WACC necessarily decline when leverage increases? 3. Levering and unlevering. 4. The Miles-Ezzell formula. 5. The MM formula. Deriving WACC We start with a firm’s expected operating cash flows C1, C2, ... , CT. With all-equity financing, these flows would be discounted at the opportunity
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