step-by-step explanation of the theory behind the concept of "required return" on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the "required return" on proposed international capital investments. Please write at least one paragraph for each step in the WACC process. The required rate of return is the minimum annual percentage earned by an investment that will encourage individuals or companies to invest
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California Pizza Kitchen Case FIN 4385 Eric Lundberg Kelly Deeds Kevin Pope Drew Williams Summary of California Pizza Kitchen Recapitalization Proposal * Brief history of CPK (p.3) * Reasons for CPK’s success (p.3) * Ways to facilitate the success of CPK (p.3-4) * Anticipated effect of changing the capital structure on return on equity (p.4) * Anticipated effect of changing the capital structure on cost of capital (p.5) * Expected number of shares of CPK that can
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company. II. Methodology for Calculating Cost of Capital Joanna is correct to use the WACC method for computing the costs of capital. However, her estimation of the proportion of debt to equity is incorrect because she uses book values from the past instead of using the current market values. The reason why we must use the current market value of debt and equity is so that the estimate of Nike’s present day WACC is as accurate as possible. Using book values, even though it is historical information
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Chapter 11 Efficient Capital Markets: Evidence 1. Roll’s critique (1977) is based on the assumption that capital markets are in equilibrium. What happens when the market is not in equilibrium? Suppose new information is revealed such that the market must adjust toward a new equilibrium which incorporates the news. Or suppose that a new security is introduced into the marketplace, as was the case of new issues studied in the Ibbotson (1975) paper. Given such a situation, the abnormal performance
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Delta Apparel Inc. (DLA) Corporate Overview Delta Apparel, Inc., through its subsidiaries, operates as an international design, marketing, manufacturing, and sourcing company that features a portfolio of branded and private label activewear apparel and headwear. The company primarily offers casual and athletic products for men, women, juniors, youth, and children under the Soffe, The Cotton Exchange, Intensity Athletics, Junk Food, and The Game brand names. It also markets apparel garments for
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(13-10) Corporate Valuation The financial statements of Lioi Steel Fabricators are shown below—both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted average cost of capital is 11% Income Statements for the Year Ending December 31 (Millions of Dollars Except for Per Share Data) Actual 2010 Projected 2011 500.00 $ 530.00 360.00 381.60 37.50 39.80 397.50 $ 421.40 102.50 $ 108.60 13.90 16.00 88.60 $ 92.60 $35.44 53.16
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1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest to 17.6% which points to a WACC of 9.45%. If the firm undertook a more substantial amount of debt, the cost of the debt would not continue to be 7.75% so it is beneficial for HPL to keep its debt low. n the balance sheet. The company lacks sufficient amount of cash to fund the
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------------------------------------------------- Chapter 15 Capital Structure Decisions ------------------------------------------------- ANSWERS TO END-OF-CHAPTER QUESTIONS 15-1 a. Capital structure is the manner in which a firm’s assets are financed; that is, the right-hand side of the balance sheet. Capital structure is normally expressed as the percentage of each type of capital used by the firm--debt, preferred stock, and common equity. Business risk is the risk
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WACC or Weighted Average Cost of Capital: Summary “Cheat Sheet” by MBAbullshit.com Money (capital) needed to run a company comes from either borrowing (debt) or the owners’ money (equity). The COST of capital is either the interest payment on the debt, or the required profit that the owners want in return for their investment (in MBA bullshit language: “expected return”). The expected return or COST OF EQUITY is determined by another financial model, the CAPM or the CAPITAL ASSET PRICING MODEL
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further progress through my reasons for rank is that the company has acknowledged the potential for the low WACC of 10% value. We are able to acknowledge that this rate in most cases is seen to be hire as noted by the board. From this I was able to slowly adjust the resulting analysis of data to utilize what I thought was to be most important by prioritizing NPV in relation to the increasing WACC value. After consideration I was able to justify that Project 7 is the best investment as
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