Sampa Video: essay: Question 1] What are the annual projected free cash flows? What is the NPV of the project assuming the firm was entirely equity financed? What discount rate is appropriate? Annual Projected Free Cash Flows Detailed annual projected free cash flows calculations are summarized in APPENDIX I. Free Cash Flows (FCF) are calculated using following relationship. FCF = EBIAT + Depreciation - Investments In brief, annual projected free cash flows are as following.
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October 10, 2012 i. Risk-Free Rate Risk-free rates will depend on when the cash flow is expected to occur and depend upon the period over which investors want the return to be guaranteed. Consequently, we need to take the time horizon into consideration to find out the most suitable risk-free rate. Midland Energy Resources is a well-established company with 120-year history. It is not a company which relies on seeking special opportunity to earn instant profit so that 1-Year T-bond rate is obviously
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Nov. 25th, 2014 Marriott Case 1) Marriott Corporation is trying to determine the proper WACC it which to value it’s projects in the near future. A problem exists because the market (especially the bond market) has been quite volatile, which affects the risk free rate. The risk free rate is the foundation of CAPM, which will be needed to determine the WACC. 2) The problems arise because the four key elements of Marriott’s financial strategy are managing hotel assets rather than owning, investing
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overview and understanding of the whole process to the managers. II. INTRODUCTION TO WEIGHT AVERAGE COST OF CAPITAL (WACC): WACC is the weight average of the expected after-tax rates of return for all firm’s various sources of capital (Sheridan, 2011). In Midland, WACC is considered as the market-based weight average of the after-tax cost of debt and cost of equity: Estimation of WACC was used in many researches and analyses within Midland, including asset appraisals for capital budgeting and financial
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Petrochemicals (“Petro”)). These uses affect different areas of the firm by changing various parts of the Weighted Average Cost of Capital (“WACC”). Such changes could happen to anyone of the parts of “WACC” (parts listed in excel document). Also, since anyone of the uses listed previously could be for an individual business unit or Midland as a whole these “WACC” formulas need to be calculated. This is due to the fact that if there is a Performance Assessment for “E&P” or Asset appraisals for both
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Petrochemicals ......................................................................................................... 5 3) EMRP ................................................................................................................. 6 III. WACC &
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issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it isimportant to estimate precisely the weighted average cost of capital (WACC). In our analysis, we examine why WACC is important in decision making andwe show how WACC for Nike Inc. is calculated correctly. Also, we calculatethe company's cost of equity using three different models: the Capital AssetPricing Model (CAPM), the Dividend Discount Model (DDM) and the EarningsCapitalization
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observed that values calculated from all the three methods were almost the same. We calculated the WACC using the return on assets derived by unlevering the equity beta of Celeron, which was comparable to the project at hand since Celeron was in the business of operating natural gas pipelines and processing facilities. To ensure a thorough discussion, we did a sensitivity analysis by calculating the WACC using a range of different capital structures namely Goodyear’s and Celeron’s current debt to market
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(100) 1 25 2 75 3 25 – – – – Discount at weighted average cost of capital (WACC) Assumes cash flows are reinvested at WACC NPV varies inversely with WACC Decision Rule: • Accept if NPV ≥ $0 • Reject if NPV < $0 – NPV represents change in the value of operations from accepting a capital budgeting project • Thus, NPV accrues to shareholders and creditors WACC = 10% Net Present Value Year 0 Cash Flow (100) 1 25 2 75 3 25 N CFt
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Chapter 11 The Cost of Capital Sources of Capital Component Costs WACC Adjusting for Flotation Costs Adjusting for Risk 11-1 What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock 11-2 Calculating the Weighted Average Cost of Capital WACC = wdrd(1 – T) + wprp + wcrs The w’s refer to the firm’s capital structure weights. The r’s refer to the cost of each component. 11-3 Should our
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