preferred stock by 1 minus the tax rate, as we do for debt? Solution: Because dividends on preferred stock, unlike interest on debt, are paid out of after-tax income. LG2 11-3 Expressing WACC in terms of iE, iP, and iD, what is the theoretical minimum for the WACC? Solution: The theoretical minimum WACC would be that for an all-debt firm: iD × (1-TC) LG3 11-4 Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The Constant-Growth model
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increasing shareholder value, optimizing the use of debt, and repurchasing their undervalued shares. Marriott Corporation relied on measuring the opportunity cost of capital for investments by utilizing the concept of Weighted Average Cost of Capital (WACC). In April 1988, VP of project finance, Dan Cohrs suggested that the divisional hurdle rates at the company would have a key impact on their future financial and operating strategies. Marriott intended to continue its growth at a fast pace by relying
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1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? Answer: The cost of capital refers to the maximum rate of return a firm must earn on its investment so that the market value of company's equity shares will not drop. This is a consonance with the overall firm's objective of wealth maximization. WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately
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empresas La tasa de descuento apropiada para descontar el DCF es el Costo Promedio Ponderado de Capital (WACC) WACC t = d × D% (t −1) + e × E% (t −1) Donde: d = Costo de las deuda en el período t D% (t-1) = Porcentaje de deuda sobre activos al comienzo del período t e = Costo del Patrimonio (equity) en el periodo t E% (t-1) = Porcentaje de patrimonio sobre activos al comienzo del período t El WACC depende de dos componentes: 1. situación del mercado financiero: el cual asigna un costo a los dineros
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At the time of the case (May 2010), H. J. Heinz was experiencing uncertain economic times. Most notably, this uncertainty manifested in discussion about the company’s weighted average cost of capital (WACC). This was an important discussion to have since the cost of capital greatly influenced how the company chose to invest, and stood to influence the company’s corporate strategies and competitiveness in the future. The uncertainty of the times was significantly reflected in the company stock
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riskadjusted hurdle-rate system. The tasks for the student are to resolve the debate, estimate weighted average costs of capital (WACCs) for the two business segments, and respond to the raider. Suggestions for complementary cases: “Nike Inc.” (case 13) gives an introductory exercise in the estimation of the cost of capital. “Coke vs. Pepsi, 2001” (case 14) offers the estimation of WACCs for two competitors and opportunities to reflect upon how business risk drives cost of capital. “Phon-Tech Corp.” (UVA-F-1161)
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Capital Structure – Chapt. 16 in text Does Capital Structure affect firm value? MM Proposition I (No Taxes): The value of a levered firm is equal to the value of an unlevered firm. VL = VU. i.e., Financing Choices do not add value. Why? Because you can create homemade leverage if you wish. • Unlevered Firm vs. a Levered Firm with the same assets. Recapitalization of Trans Am Corporation. Debt issue of $4,000,000 at 10% to buy back equity. Alternatively, you may view them as
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Bob: 1. Discount rate = Hurdle rate = after-tax WACC 2. WACC = blend of rates of return expected by investors 3. Interest is tax-deductible: bank loan 8*(1-,35)=5,2% 4. Rate of return preferred share 6% 5. Target Rate of Return 16% 6. WACC = 8*(1-,35)*,2+7,75*(1-,35)*,133+6*,167+16*,5=10,7% Bernice: 1. Book = market value 2. Preferred stock book value = 100, market = 70 3. Common stock = 40, Earnings 10% = 4, Div =2, PBR=0,5 4. Growth rate = R on equity * PBR = 4/30 * ,5 = 6,7% 5
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FIN303 Exam-type questions For Final exam Chapter 9 1. Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct? a. The two stocks have the same dividend yield.
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ASSIGNMENT 8 SAMUEL ALVAREZ PROBLEM 5.1 As it is explained in the Exxon example, a firm might use a Divisional WACC, by identifying comparison firms(comps). These are firms that would have a similar risk and capital structure than the division for which we are trying to find a divisional WACC. The idea is to use an average WACC of these firms as an estimate WACC for our division. This would reduce the risk of the firm taking overinsting/underinvisting in its divisions. PROBLEM 5.2 Our
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