CASE 90: Northern Forest Products | Topic: Cost of Capital | Instructor: Dr. BILICI and Dr. Tran Phi Long | GROUP 11: Nguyễn Diệp An Hoàng Tiến Nhật Anh Phạm Nguyên Hạnh Đỗ Quang Huy Nguyễn Hoàng Long Nguyễn Phương Thủy Phạm Anh Thư Phan Thị Thu Trang Nguyễn Đức Trung Vũ Thị Minh Tú NOTHERN FOREST PRODUCT CASE STUDY Question 1: Explain the importance of risk adjustment in the capital budgeting allocation process by answering the following questions. a. Explain why risk adjustments
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is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance? EVA stands for economic value added. EVA is a value based financial performance measure based on Net Operating Profit after Taxes, the invested capital required to generate that income, and the WACC. The primary advantage of EVA is that it provides a measure of wealth creation that aligns the goals of divisional or plant managers with the goals of the entire company. A primary disadvantage with
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FI516 A. Here are the basic Definitions that relate to capital structure: V= Value of Firm WACC=Weighted average Cost of Capital FCF= Free Cash Flow rs And rd = Costs of stock and debt wce And wd = percentages of the firm that are financed with stock and debt Impact of capital structure is based upon the value of the effect that the debt have on the Weighted Average Cost of Capital and/or the Free Cash Flow. The debt holders, compared to the stockholders, have prior claim on cash flow
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Pathrite System, since the expected value of the net present value of the project is positive, no matter we consider the CCA rate or not. 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
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year indefinitely. The firm has a debt/equity ratio of 4.0, a cost of equity of 12%, and an after-tax cost of debt of 6%. The cost-saving proposal is related to the firm’s core business, so it is viewed as having the same risks as the overall firm. Under what circumstances should the firm take on the project? WACC = 7.20% PV of cash savings = $125,000,000 ? Thus, the firm should take on the project if the initial investment cost of the project is less than $125 million. 5. EOCQ 20) The Mark
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and discounts the cash flow at a discount rate which was calculated using two of three options. In turn, this was done using the Weighted Average Cost of Capital (WACC). The motive for using WACC to get the discount rate is to attain excellent results. WACC’s utilization is viewed as a more ideal structure when the values attained reflects more than the Current Cost of Investment. The sum total of all the discounted cash flows are referred to as the Value of the firm. Mr. Hawks requested that
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approach, Boston Beer Company’s future free cash flows of the next ten years are projected in the spreadsheet. Present value of the company at the end of 1995 is calculated by discounting ten year’s free cash flows and terminal value by weighted average cost of capital. As we can see from the spreadsheet, the company fair value is $210.78 million. Subtracting the debt level of $1.95 million, the equity value is therefore $208.83 million. Appendix 1 includes the full valuation model we used. The key
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QUESTIONS FOR THE OVERALL ASSIGNMENT 1. What is the best way to estimate the company and divisions’ cost of capital? Answer: The best way to estimate the cost of capital is by using the CAPM (Capital Asset Pricing Model) where the Weighted-Average Cost of Capital (rwacc) is given by the formula [pic] Where, D is the market value of the net debt E is the market value of the total equity V is the total market value of debt and equity = D + E
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petrochemicals. Pioneer at the time was one of the lowest cost refiners on the West Coast and had an extensive West Coast marketing network. In 1990, total revenue exceeded $15.6 billion and net income was over $1.5 billion. Pioneer was subject to extremely volatile prices in oil. Because of this, the management of Pioneer emphasized the importance of operational and financial flexibility to respond to any price swings. Pioneer spent about $3.1 billion on capital expenditures in 1990, and the forecast for 1991
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financial forecasting and the business valuation models. The four companies Alex and Ani, I.T. source, Mastero technologies, and Veteran Corps of America. The first company Alex an Ani cost of capital and the weighted average for the cost of equity and the cost of debt for each corporation. The cost of capital rate should be used as the discount rate for present value (PV) of the free cash flow (FCF) and terminal value (TV) of the business.The business valuation calculation for Alex an Ani show
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