optimizing its capital structure and to repurchase undervalued shares. It firstly allows Midland to figure out the reasonable amount of financing, range of capital structure, and WACC for the whole company basing on the required interest rate of market. Then, Midland could use its capital planning model to make adjustments on WACC of the whole company so that it will become more suitable for each division, which can apparently reduce the possibility of making mistake when division managers chose projects
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When debt is added to the capital structure, the Weighted Average Cost of Capital (WACC) of HCSF decreases due to the value of the tax shield. However, increasing debt too heavily increases the risk of equity, and thus the present value of financial distress more than the present value of the advantage of the tax shield, offsetting the value-creation of the tax shield. As a result, WACC will increase. The risk of equity increases because as our contractual obligations for repayment
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Capital Budgeting Finance 100 Prof. Michael R. Roberts Copyright © Michael R. Roberts 1 Topic Overview How should capital be allocated? » Do I invest / launch a product / buy a building / scrap / outsource... » Should I acquire / sell / accept offer for company or division? » How should the capital budgeting process be organized? Which choices should I make? » make or buy » which distribution channel » should I test market a product Copyright © Michael R. Roberts 2 1 1
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without corporate taxes says that a firm's relative proportions of debt and equity don't matter; MM I with corporate taxes says that the firm with the greater proportion of debt is more valuable because of the interest tax shield. MM II deals with the WACC. It says that as the proportion of debt in the company's capital structure increases, its return on equity to shareholders increases in a linear fashion. The existence of higher debt levels makes investing in the company more risky, so shareholders
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company can be improved when Marriott purchases the undervalued shares and destroys them afterwards. The return on assets will then increase. If the company is funded with debt a positive leverage effect could be achieved. 2.-5. WACC Weighted Average Cost of Capital (WACC) is used for calculating the cost of capital.
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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
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can assume that the risk free rate was 8.82% and market risk premium was 5.4%. Third, according to Exhibit 9, the capital structure weights used were 26 percent for the defense division and 74 percent for the commercial aircraft division. ii. WACC calculation After making the above mentioned assumptions, we proceeded in calculating the weighted average cost of capital. In order to calculate the betas of the two main divisions of Boeing, we first need to determine the β for one division. In
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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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points. Fill in the answer form with the letter choice of your answer and submit it as a word document or text document (.txt). [1] A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC). [A] True [B] False [2] Because "present value" refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project. [A]
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rP os t UV0112 Rev. Feb. 24, 2009 METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS op yo This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting. It provides a detailed description of the discounted-cash-flow (DCF) approach and reviews other methods of valuation, such as market multiples of peer firms, book value, liquidation value, replacement cost, market value, and comparable transaction multiples. Discounted-Cash-Flow Method Overview
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