structure of the firm on market valuations. In other words, does capital structure influence value of the firm? I believe the introduction of the paper gives an important explanation of how Modigliani has reached his theorem, because his main goal was to correct the drawbacks of other theories. To understand the importance of such a theory, I considered adding these other theories as an introduction of this summary. The cost of capital to the owners of a firm is simply the rate of interest in bonds;
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* ,5 = 6,7% 5. CAPM = rf + B (rm – rf) = 7+,5*7 = 10,5% Questions: 1. Cost of equity calculations 2. Other ways of Cost of equity calculations instead of CAPM 3. Errors in calculations Check Bob: 1. Discount rate = Hurdle rate = after-tax WACC ok 2. WACC = blend of rates of return expected by investors ? Weighted average cost of capital (WACC) is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds and any other long-term
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Cost of Capital Estimate for Midland Energy Resources, Inc. In the first section of my report, I list out the main models and methods applied to estimate the cost of capital for Midland’s three divisions, general assumptions made and the corresponding justifications. In the second section, Calculations, I not only compute the cost of capital based on the general assumptions previously made, but also discuss specifics of each division and the additional adjustments or assumptions made to justify
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Problem: Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions
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Cost of Capital NSKD Berhad is considering a project which costs RM2 million and interested in measuring its overall cost of capital. Tax rate charged 40%. One of component’s cost of capitals is cost of debt. The firm can raise unlimited amount will be selling RM1,000, 10 percent, 10 year bond on which semiannual interest payment will be made. An average of RM80 per bond would have to be given in selling that bond. For preference share, the firm can pay dividend 11 percent of this share at is
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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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it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their
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an up-front cost (t = 0) of $120,000, and it is expected to produce cash inflows of $80,000 per year at the end of each of the next two years. Two years from now, the project can be repeated at a higher up-front cost of $125,000, but the cash inflows will remain the same. • Project B has an up-front cost of $100,000, and it is expected to produce cash inflows of $41,000 per year at the end of each of the next four years. Project B cannot be repeated. Both projects have a cost of capital of 10 percent
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Topic: Nike Inc.: Cost of Capital Course: International Finance Table of Contents 1 Background Information on the Case: 3 1.1 Nike’s Performance: 3 1.2 Nike Analysts Meeting June 28, 2001: 3 2 Kimi Ford’s Evaluation of Nike: 3 3 Joanna Cohen’s Calculation of Nike’s Cost of Capital: 3 3.1 Assumptions & Calculations: 3 4 Our Calculation: 4 4.1 Cost of common equity 4 4.2 Cost of debt 4 4.3 Weights of Debt and Equity 4 4.4 WACC 5 4.5 Equity Value of Share
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after 2011. The weighted average cost of capital is 11%. a. If operating capital as of 12/31/2010 is $502.2 million, what is the free cash flow for 12/31/2011? b. What is the horizon value as of 12/31/2011? c. What is the value of operations as of 12/31/2010? d. What is the total value of the company as of 12/31/2010? e. What is the intrinsic price per 13-10 A) Free cash flow = NOPAT NOPAT = EBIT x (1-tax rate) =108.6 x (1- 0.4) = 65.16 million Operating Capital NOWC= (5.6 + 56
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