financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures: ------------------------------------------------- ------------------------------------------------- % Financed With Debt rd ------------------------------------------------- 0%
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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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represents the CF impact of the project. The present discounted value of these incremental CF is the NPV of the project * CF = EBIT – Taxes + Depreciation – Capital Expenditures (CAPX) * EBIT (Earnings Before Interest & Taxes) = Revenues – Cost – Depreciation * EBIAT = EBIT * (1-TaxRate) * Taxes = CorpTaxRate * (Revenues – Costs – TaxShield) * FinalCF = SellingPrice – Taxes * NWC = Current Assets – Current Liabilities (change in NWC must = 0) * Projects of greater risk
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This capital can go to any financial need such as; research expenses, advertising, license and permit fees, and to the purchasing of supplies and equipment. There are many good reasons why a company would incur long-term debt, but too much debt could obviously cause problems. One area of long-term debts that we observed is the analysis of the debt to equity ratio. The following includes an evaluation of the impact on the capital structure, as well as recommendations for debt management, capital allocation
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Executive Summary - Valuation of Manufacturing Plant of American Chemical Corporation (ACC) Problem Statement This report discusses; 1- Determination of weighted average cost of capital (WACC), cash flows and NPV of ACC’s Collinsville Plant with and without Laminate technology. 2- Evaluation of plant’s acquisition proposal on economic grounds. 3- Evaluation of plant’s acquisition proposal on strategic grounds. 4- Strategic issues associated with the proposal. 5- At the given price and terms
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Proposed Capital Investment and Capital Structure of Madison Products Ltd. Date: 09/01/2013 I was asked to draft you a short report detailing the proposed capital investment and review the current capital structure of the firm. I will start out by looking at the proposed new product line of luggage and travel goods, I will then go on to study the Capital Structure of the firm and give any suggestions to you that I might have to help improve it. (1) Proposed Capital Investment The capital investment
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or continue to purchase from another mill? Blue Ridge Mill, a subsidiary of Worldwide Paper Company, is considering this strategic move to save on operating costs and enter a new market on the recommendation from Bob Prescott, the controller of the mill. With production set to begin in 2008, Worldwide Paper Company would see an operating costs savings of $2.0 million in 2008 and $3.5 million per year in the years after. This savings comes from producing their own shortwood product versus purchasing
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EXECUTIVE SUMMARY The business nature of the project—pipelines—affected many of our assumptions and approaches to our calculations for our ultimate decision. The case provided two sets of cost estimates from an outside consultant and from Goodyear after hiring a general contractor. We utilized both sets of costs that directed us to the same decision that Goodyear should not go ahead with the Pipeline Project. Once we obtained the UFCF, the terminal value was calculated in three different ways, treating
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Aswath Damodaran 1 VALUATION Cynic: A person who knows the price of everything but the value of nothing.. Oscar Wilde First Principles 2 Maximize the value of the business (firm) The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to
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Jennifer’s analysis and recommendation are several political issues involving the wayward division. In particular, Working’s recently returned CEO, Stewart Workman, has decided that the product (the Bernoulli device) is a “loser” and has plans to use the capital currently committed to Bernoulli to boost the ailing performance of other parts of the firm. . JUST THE FACTS Jennifer had discretely gathered a great deal of information from the Bernoulli unit as well as several of its competitors. In addition,
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