introduction of the new product line? a. Use the weighted average cost of capital (11.7%) to value the project b. Assume the net working capital required for a year must be in place at the start of the year. Thus, for the first full year of operations, 1990, the net working capital needed to support that year’s business ($1300, Exhibit #3) must be acquired at 1/1/90. 15 c. Assume start-up marketing expenses (footnote c, Exhibit #3) and start-up capital expenditures are incurred at the beginning of
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Introduction This report is to analyse the capital structure of Sainsbury and Morrison. They are the top food retailer and grocery brand in UK market. These two companies use similar debt-equity structure both but with different leverage. Several measurements and methods are used to evaluate companies’ structure and financial decision, including D/E ratio, WACC, CAPM, M&M, Pecking order theory, trade-off, and free cash flow hypothesis. D/E Ratio Debt/Equity Ratio is a debt ratio used to
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why Philip Morris has a relatively low P/E ratio 10. Why has Philip Morris decided to sell Seven-Up, despite the fact that it would be incurring a significant capital loss? 11. What (better) alternative would you suggest to Philip Morris’ management for the use of the firm’s excess cash? 12. According to the trade-off theory of capital structure, why should Philip Morris use a higher leverage ratio (independently of the
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the analysis of Blaine Kitchenware’s capital structure, I recommend share repurchase. Stock repurchase would result in a change in firm value and stock price for Blaine Kitchenware, and it will also contribute to optimal debt capacity through allowing the firm to utilize tax deductible financing. Blaine currently faces many risks as a result of the surplus cash including takeover threat and inappropriate payout structure. Blaine Kitchenware’s current capital structure and payout policies are inappropriate
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determining the best financing mix or capital structure for his firm. Capital structure could have two effects. First, firms of the same risk class could possibly have higher cost of capital with higher leverage. Second, capital structure may affect the valuation of the firm, with more leveraged firms, being riskier, being valued lower than less leveraged firms. If we consider that the manager of a firm has the shareholders' wealth maximisation as his objective, then capital structure is an important decision
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The Boeing 777 Darden Case Study UVA-F-1017 Case Study Assignment Subject: Cost of capital − cost of equity and cost of debt; beta risk; estimation; capital structure. The task for students is to evaluate the 777 against a financial standard, the investors’ required rate of return. The general objective of this case is to exercise students’ skills in estimating corporate (divisional/project) costs of capital – cost of equity and WACC. Case Questions, Analysis, and Directions: Read and analyze
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three options available to them. a. The first option is to buy the engine. They would have to place an order with the IAE and expect to get the engine in late 2007. However the cost of engine will be escalated (3-5%) and there was no full proof way to determine the exact cost of purchase of engine. As the cost of the engine was around $4.5M such an escalation was harmful for the company. b. The second option was to sale and lease back wherein the company had already consulted and arranged
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What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-free rate did you use? Why? e. Which capital-structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? a. Under what circumstances
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accounted for 25% of total revenue. Additionally, revenue is broken up as follows: 51% is in notebook sales, 28% is in desktop sales, 15% is in mobile internet devices, and the rest is in other areas.iii Cost of Equity: Re=Rf + CRP + β (MRP) = 2.59% + .90% + .76 (3.07%) = 5.82% To calculate Lenovo’s cost of equity, I used a method of CAPM in which I added a country risk premium to the standard CAPM equation. Rf =2.59% In order to maintain consistency between cash flows and the risk free rate, I chose
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number of ways, but in this instance the Discounted Cash Flow method will be used. In order to utilize this method, the Weighted Average Cost of Capital (WACC) has to be calculated. Based on the financial reports, the WACC is estimated to be 12%. In addition, the horizon value of the company must also be calculated. The capital expenditures, depreciation, and working capital are not very significant in this calculation. The $13 million in generated cash needs to be added to the discounted cash flows
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