Chapter 9 Mini Case During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following
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project you can use the CAPM equation to calculate the cost of equity rE as: rE = rf + *(rm - rf) where rf – risk free rate and (rm - rf) – risk premium Once cost of equity is calculated, weighted average cost of capital can be calculated as below: WACC = (1-T)*(D/D+E)*rD + rE * (D/D+E) where T – tax rate, D – market value of debt, E – market value of equity and rD – cost of debt The biggest concern for Dan is to calculate the appropriate beta and thus discount rate for each of the three divisions
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alternatives, while looking at the optimal weighted average cost of capital (WACC), net present value (NPV), and reviewing a sensitivity analysis and valuation techniques. Weighted Average Cost of Capital (WACC) The Guillermo Furniture Store should choose the option that will give it the best competitive advantage. The company needs to determine the WACC in order to determine the minimum return needed on an investment. WACC is the, “weighted average cost of the components of any financing package
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1. Formula for cost of capital: WACC = wdrd(1-T) + wpsrps + wsrs The cost of capital is important to calculate for any company that is making a decision on accepting or rejecting a project. If the expected rate of return on a project exceeds the calculated cost of capital, then the company should move forward with the project. The cost of capital is particularly important for Encana because they are expecting to grow in size. Calculating the WACC will be necessary for use in their capital
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The Financial Analysis of The Home Depot By: The CPT Consulting Group 10-3-11 CPT Consulting Group Table of Contents I. Introduction II. Board of Directors and Corporate Governance III. WACC and Capital Structure IV. Degree of Operating leverage V. Dividends VI. Conclusions VII. Appendix I. Introduction The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank. The home depot Inc., collectively with its subsidiaries, operates as a
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Capital Allocation Policy Authorization for Expenditure (AFE) present the project's linkage to the business strategies. include specific details of economic and engineering, involvement and empowerment, human resource, environment. Cost of Capital (WACC) Net Present Value Questions? Thank you! Laurentian Bakeries Inc established in 1984 manufactured a variety of frozen baked food products at plants in Winnipeg (Pizzas), Toronto (Cakes) and Montreal (Pies) In late May, 1995, Danielle Knowles, vice
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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
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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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1) Are the four components of Marriott's financial strategy consistent with its growth objective? • Manage rather than own hotel assets. o Profiting from the sale of its hotel assets while still generating revenue from those assets, reduces risk increases ROA, profitability, and frees up cash for other positive NPV opportunities. This process is consistent with its strategy of growth. • Invest in projects that increase shareholder value. o As long as the company invests in projects with
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capital (WACC). The WACC depends on the percentages of debt and common equity, the cost of debt, the cost of stock, and the corporate tax rate. The WACC is a weighted average of relatively low-cost debt and high-cost equity. If the proportion of debt is increased, then the weight of low-cost debt increases and the weight of high-cost equity decrease. By changing the capital structure affects all the variables in the WACC equation, but it’s not easy to say whether those changes increase the WACC, decrease
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