decisions To compare and contrast the NPV and APV methods of analysis Nature of expansion decisions Expansion cash flows Valuation alternatives: NPV; APV Derivation of NPV model Derivation of APV model Capital structure issues Topics: Initial Capital investment Additional Capital investment For replacement and expansion - $ FCF FCFs are a function of value chain and industry economics Expansion FCFs are incremental to the base case and are attributable to the project
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firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at the required return on the equity flows; capital cash flow discounted at the WACC before taxes; and Adjusted Present Value) always give the same value. The disagreements in the various theories on the valuation of the firm arise from the calculation of the discounted value of tax shields (VTS).
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Nike, Inc: Cost of Capital 1. What is the WACC and why is it important to estimate a firm’s cost of capital? * WACC stands for Weighted Average Cost of Capital, it is the weighted average of the costs of debt, preferred stock, and common equity a company has. Using the weights of each of its components, and the component costs, WACC intends to find out whether an investment will be profitable to the company. It’s important to estimate the firm’s cost of capital in order to know if an investment
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interaction of cashflows and hurdle rates, and the determinants of firms’ capital structure policies. Unlike previous studies which examine investment decisions by either using survey data or data obtained from financial tapes, we use both sets of data. This approach produced one of our primary findings that there is a hurdle rate premium puzzle, in that hurdle rates used by our sample of firms exceed their cost of capital that we calculate using Compustat data by 5%. We investigate the determinants
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president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the company needs separate discount rate to evaluate its projects. This report is prepared to find out the realistic measures for assessing cost of capital for Midland Energy Resources. After careful evaluation of available information
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president of project finance for Midland Energy Resources must determine the weighted average cost of capital (WACC) for the company as a whole and each of its divisions as part of the annual capital budgeting process. As each division has different functions and risk associations, the company needs separate discount rate to evaluate its projects. This report is prepared to find out the realistic measures for assessing cost of capital for Midland Energy Resources. After careful evaluation of available information
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Summary Leverage and Capital Structure Leverage refers to the effects that fixed costs have on the returns that shareholders earn. “Fixed costs” refer to costs that do not rise and fall with changes in a firm’s sales. Capital structure is the mix of long-term debt and equity maintained by the firm. Breakeven analysis is used to indicate the level of operations necessary to cover all costs and to evaluate the profitability associated with various levels of sales; also called cost-volume-profit analysis
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previous analysis the budget and actual cost will be close. Guillermo will try to get the variance analysis close from being significantly lower. Guillermo carefully studied the other companies and how each of them operated differently and improved his or her profits. Weighted Average Cost of Capital After doing the weighted average cost of capital, Guillermo came up with 15.7% in 2010 weighted debt. Guillermo also came up for 2011 17.5%. After confirming the weighted debt Guillermo’s asset, liabilities
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$1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? 2. Assume that Kelly Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.80; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings? 3. You were recently hired by TOM TOM Inc. to estimate its cost of common equity. You obtained the following data: D1 = $1.75;
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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 factors are involved in determining the “required return” on proposed international investments. The required rate of return is the is the minimum rate of return an investor should accept, given all options available within the capital structure of the firm. For this hypothetical situation it can be defined as the minimum
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