debt and higher cost of equity will always have higher WACC. Look at the comparison between IBM and Target. IBM has the lower cost of debt and equity than Target. However, IBM has least leveraged capital structure (Debt-to-Equity ratio= .177/.823 = 0.216) while Target has the most leveraged capital structure with Debt-to-Equity ratio = 0.966. The extremely high portion of equity capital in IBM increases its weighted cost of equity and thus its WACC. In nutshell, highly leveraged firms do not necessarily
Words: 721 - Pages: 3
help make this decision I used both the NPV and IRR methods which are used in capital budgeting to analyse the profitability of an investment. The NPV gave me a positive Net Present Value of €1,037,312 (Appendix 1) after using a discount rate of the WACC calculated of 12.79% for companies in this industry. Since this project gives us a very high NPV this project should be accepted under this method. I also calculated the Internal Rate of return for this product to confirm what the NPV has told us
Words: 1384 - Pages: 6
III. Statement of Situation Kimi Ford thought about investing in Nike. After reading the reports from Nike’s analyst meeting, she still was not sure whether to invest or not. Lehman Brothers determined Nike was a great investment; however, UBS Warburg and CSFB analysts disagreed. Since the reports did not help Kimi Ford out with her decision, she decided to develop her own discounted cash flow analysis. As shown in Exhibit 1, Kimi Ford projected her own discounted cash flow analysis with her assumptions
Words: 1434 - Pages: 6
the WACC for the firm will be different at different blends of debt and equity financing (which means the value of the firm will be different at different blends of debt and equity financing) You can see the effect in the WACC formula: WACC = Wd(ATRd) + Ws(Rs) (no preferred stock in this example) If AT Rd = 6% and Rs = 12%: At zero debt: WACC = 0(.06) + 1.00(.12) = .12, or 12% At 50/50 debt and equity WACC = .50(
Words: 1413 - Pages: 6
------------------------------------------------- FI – 516 – WEEK 2 - MINI CASE – ANSWER KEY Assume that you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company’s EBIT was $50 million last year and is not expected to grow. The firm is currently financed completely with equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms’ owners would
Words: 3189 - Pages: 13
analysis on the Company as an investment has been done with use of DCF model that uses the present value of the expected future cash-flows. In addition, the analysis has been done using the future cash-flows for the years 2012 to 2015. The company’s WACC has been established to be 0.11% given the risk-free rate of 0.05% and the Market rate of 11%. With that consideration, the enterprise values for the two scenarios including a bullish and bearish scenario have been calculated as $659.41 and $546.43
Words: 2749 - Pages: 11
10/6/2010 1. Timeline of the free cash flows for the 10 years of the project. (all numbers are in millions) |year |0 |1 |2 |3 | |Long Term Debt | 75.079,3 | 63.799,4 | 59.706,0 | 53.165,0 | |Cash and Equivalents | 24.170,3 | 25.204,6
Words: 1199 - Pages: 5
average cost of capital (WACC) is the rate that a company is expected to pay to debt holders and shareholders to finance its assets. It is the minimum return that a company must earn on existing assets base to satisfy its owners, creditors, and other benefactors of the firm. There are numbers of ways a firm can raise funds: common and preferred equity, governmental subsidies, warrants, debts, and so on. Each of this securities are expected to produce different returns. WACC is calculated using relative
Words: 1054 - Pages: 5
compute the levered value of the plant using the WACC method. Goodyear’s WACC is Therefore, A divestiture would be profitable if Goodyear received more than $47.6 million after tax. 18-5. Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%. a. What is Alcatel-Lucent’s WACC? b. If Alcatel-Lucent maintains a constant debt-equity
Words: 274 - Pages: 2
Hansson Private Label | ACF - I | 1. How would you describe HPL and its position within the private label personal care industry? HPL manufactures personal care products that are sold under the band label by other companies. The company has stable whole sales growth rate and has become successful by efficient manufacturing, good expense management and appropriate customer service. In the recent years, the company has been facing a great amount of competition in the private label industry
Words: 798 - Pages: 4
