addresses the valuation of firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at the required return on the equity flows; capital cash flow discounted at the WACC before taxes; and Adjusted Present Value) always give the same value. The disagreements in the various theories on the valuation of the firm arise from the calculation of the discounted
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1. Weighted Average Cost of Capital calculation and analysis The overall method used to calculate the expected value of the net present value of the project is to first calculate the real weighted average cost of capital of the firm, use the WACC to discount the operating cash flows adjusted for inflation and earned in the next 6 years, add the tax shield given by the depreciation minus the initial investment (since the case doesn’t any CCA rate, we calculate tax shield both with the CCA rate
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therefore, the cost of capital has to be a pertinent return for that particular division. 2. Calculate Midland’s corporate WACC. Be prepared to defend your specific assumptions about the various inputs to the calculations. Is Midland’s choice of EMRP appropriate? If not, what recommendations would you make and why? The appropriate EMRP to use in the 2007 WACC calculation is 6.0% as listed in Table 2. Team 1 compared this rate to real-world data using the average annual total return on
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Estimating Cost of Equity with different methods. Compute WACC Nike’s current price per share= $ 42.09 Question: Is it undervalued or overvalued to make buy /sell decision? Forecasts for Cash flows, Dividend growth, EPS estimates for NIKE are given. Interest rate #’s, Betas, Book values on debt and equity are given. Also historical performance #s are given. At 12% WACC Nike is overvalued and hence sell decision; At 11.17% correct valuation; WACC below 11.17% , undervaluation and hence buy decision
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higher WACC. * Diversification of business activities would affect the perceived operating risk and choice of payment and transaction financing would also affect the perceived financial risk of the firm. * YPF WACC = 12.55% * Repsol WACC = 8.14% * Repsol-YPF (all-debt) WACC = 10.6% * Repsol-YPF (all-equity) WACC = 11.07% 2. Is Repsol’s stock fairly priced in the market or is it overvalued or undervalued? DCF | 1 | 2 | 3 | 4 | 5 | Discount factor (WACC @ 8
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Some suggested answers for the Timken case: 1) Synergies are likely to come mostly from expanding the economies of “scope”. The quote on p.1 is revealing: “… the two companies shared many of the same customers but had few products in common, (therefore) customers would surely appreciate that Timken’s sales representatives could meet more of their needs.” Further on p.8: “… the combined companies… would have many complementary products… (and) only a 5% overlap in their product offerings… (while)
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------------------------------------------------- MINI CASE – 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 be financially better off if the
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your analysis using WACC, and then using APV. In both cases, you can use the data in Exhibit 2 to calculate the unlevered free cash flows of the project. Assume that these unlevered free cash flows will grow at 5% per year in perpetuity following the year 2006; that is, if you calculate the unlevered free cash flow to be UFCF2006 in 2006, the unlevered free cash flow will be UFCF2006(1.05)t−2006 in year t = 2007, 2008, . . . When calculating the project’s value using WACC, assume that the target
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pay: a. DCF base: i. WACC 1. Unlevered Equity Beta – 0.725 2. Market Value of Debt - $12m 3. Market Value of Equity - $25,696m 4. Debt/Capital - 32% 5. Levered Equity Beta – 0.86 6. Risk Free Rate – 4.10% 7. MRP – 6% 8. Cost of Equity – 9.28% 9. Cost of Debt – 6.07% on BBB rating 10. Tax Rate - 40% 11. WACC: a. Debt – 31.8% @
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Problem 15-9 Present situation (50% debt): WACC = wd rd(1-T) + wcers = (0.5)(10%)(1-0.15) + (0.5)(14%) = 11.25%. V = = $100 million. 70% debt: WACC = wd rd(1-T) + wcers = (0.7)(12%)(1-0.15) + (0.3)(16%) = 11.94%.V = = $94.255 million. 30% debt: WACC = wd rd(1-T) + wcers = (0.3)(8%)(1-0.15) + (0.7)(13%) = 11.14%. V = = $101.023 million. Problem 15-10 a. BEAs unlevered beta is bU=b/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870. b. bU (1 + (1-T)(D/S)). At 40% debt: bL = 0.87 (1 +
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