expected rate of return of the project just like the YTM is the promised rate of return of a bond. 3. The logic behind the IRR method is that if the IRR of the project is greater than the WACC of the project then the project will be good for the shareholders. Since both franchises have a higher IRR than the WACC of 10% both should be accepted if they are independent. If the franchises are mutually exclusive then Franchise S should be accepted because it has a higher IRR than Franchise L 4. No
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crucial to keep the company’s growth. 2.Marriott use WACC to estimate its cost of capital. Weighted average cost of capital is used to calculate a firm’s cost of capital in which each category of capital is proportionately weighted. This approach required knowing the specific costs of debt and equity, as capital structure changes. All of the three factors are provided so it is appropriate to estimate the cost of capital. 3.To calculate the WACC of capital, it needs to find out the cost of debt and
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certeras de sus oportunidades. 2. ¿Para qué necesita Midland Energy Resources sus estimaciones de costo de capital? Midland necesita las estimaciones de su costo de capital para: realizar evaluaciones de desempeño y de proyectos ya que el WACC se puede utilizar como la tasa de corte del VAN, para evaluar propuestas de fusiones y adquisiciones con otras empresas, para las decisiones de recompra de acciones y éste es importante porque es una de las estrategias financieras de Midland, para
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$F Pn F% or $F= flotation cost per share re typically higher than rs because of flotation costs. Weighted Average Cost of Capital (WACC) = wdrd(1 - T) + wprp + wc(rs or re) calculate WACC with retained earnings calculate WACC with new common stock Capital structure weights (wd, wp, wc) based on book values. The weight is the dollar amount of the capital type divided by total assets. The sum of the weights must equal 100%
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Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle Iwan Meier and Vefa Tarhan1 February 27, 2006 Abstract We survey a cross-section of 127 companies to shed light on various dimensions of the investment decisions. The questions posed by our survey examine the hurdle rates firms use, calculations of project related cashflows, the interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine
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the cost of equity to adjust to balance with the number of shares issued. 2. WACC= weight of preferred equity * cost of preferred equity + weight of common equity * cost of common equity + weight of debt * cost of debt * (1-taz x rate) WACC= 10.38%. The WACC could be used as a measure to assess projects. 3. A company should accept a project if and when the return on the project is higher than the company’s WACC. Based on the information, projects A-F should be accepted. 4. The riskier
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------------------------------------------------- Top of Form Grading Summary | Grade Details - All Questions | 1. | Question : | (TCO D) A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price? | | | Student Answer: | | $17.39 | | | | $17.84 | | | | $18.29 | | | | $18.75 | | | | $19.22 | | Instructor
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value (NPV). This project has a positive NPV of $936,147, and an internal rate of return (IRR) at 11.44% which is larger than the company’s weighted average cost of capital (WACC) at 9.85%. Consequently, the investment is expected to be able to maximize shareholders’ wealth by generating positive future cash flows. The WACC of the company is estimated based on its cost of debt and cost of equity. After tax cost of debt is computed from the bank loan rates (LIBOR +1%) at 6.38% and 10-year-bond rate
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Nike Inc. Case 1. What is the WACC and why is it important to estimate a firm’s cost of capital? WACC is weighted average cost of capital, which is the expected rate of return on average from all the company’s existing debts and securities. It takes into account all different types of financing in the company’s capital structure. The reason it is important to estimate WACC is because it measures what it costs the firm to take on a project based on its current Debt and Equity mix. When the
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The capital structure decision change the value of the firm either through the the free cash flow or the cost of capital. V = ∑ ∞ t=1 FCFt (1 + WACC)t With FCF= NOPAT-change in ( NOWC+NFA) WACC= wd (1-T) rd + wers An additional debt has an effect on WACC and FCF: On WACC: -debt increase the cost of stock rs as the stockholders require a higher return due to the risk associated with additional debt -debt reduce
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